What is the npv of the mountain bike project

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Reference no: EM131992216

FirmOne has come up with a new mountain bike prototype and is ready to go ahead with pilot production and test marketing. The pilot production and test marketing phase will last for one year and cost $500,000. Your management team believes that there is a 50% chance that the test marketing will be successful and that there will be sufficient demand for the new mountain bike. If the test-marketing phase is successful, then FirmOne will invest $3 million in year one to build a plant that will generate expected annual after tax cash flows of $400,000 in perpetuity beginning in year two. If the test marketing is not successful, FirmOne can still go ahead and build the new plant, but the expected annual after tax cash flows would be only $200,000 in perpetuity beginning in year two. FirmOne has the option to stop the project at any time and sell the prototype mountain bike to an overseas competitor for $300,000. FirmOne 's cost of capital is 10%. Assuming that FirmOne has the ability to sell the prototype in year one for $300,000, what is the NPV of the Mountain Bike Project?

Reference no: EM131992216

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