What is the expected npv of department

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Suppose that the merger is successful. But suppose (and this is a hypothetical that is not true) that Berkshire Hathaway is considering the shutdown of PCC's military aircraft and aerospace department due to its weak growth. Despite predictions of the department's 3.1% annual growth over the next five years, some analysts believe that the department's growth will remain at less than 1% over the next five years, while capital expenditures will continue to increase. Keeping the military aircraft and aerospace department would result in $250 million yearly expenditures. There is a 35% probability that the department will produce after-tax net cash flows of $100 million and a 65% chance that it will produce -$200 million in after-tax net cash flows.

Using a WACC of 10%, what is the expected NPV of this department?

If Berkshire sees that the after-tax net cash flows are -$200 million, then Berkshire can shut down the division after the first year. Then, what is the expected NPV of this department (with the option to abandon after the first year?

Should Berkshire Hathaway proceed with the shutdown?

Reference no: EM133075023

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