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Question - Chip Engineering Corporation (CEC) is designing a new type of chip. The net after-tax cash outlay on the design will be $17,000. The design will become obsolete after one year, and will be discarded at that time. CEC expects to sell chips based on this design for only one year. The cash flow generated by these new chip sales is uncertain. It has estimated the following probability distribution of after-tax cash flows from these sales for the next year:
Possible State
Probability
After-tax Cash Flow
1
.4
$16,000
2
$18,000
3
.2
$22,000
Use the above information to answer the following questions. The tax rate is 35% and the cost of capital is 12%.
What is the expected value of the after-tax cash flows from this project?
A. 17,900
B. 16,000
C. 18,000
D. 19,700
E. 20,800
F. 22,000
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