Reference no: EM132623336

A. FCF1 = $7 million; FCF2 = $45 million; FCF3 = $55 million. Assume that free cash flow grows at a rate of 4% for year 4 and beyond. If the weighted average cost of capital is 10%, calculate the value of the firm.

B. VFIC Industries has come up with a new mountain bike type A and is ready to go ahead with pilot production and test marketing. The pilot production and test marketing phase will cost $500,000 and last for one year. The 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 VFIC will invest $3 million to build a plant immediately that will generate expected annual after-tax cash flows of $400,000 in perpetuity starting in year two. If the test marketing is not successful, VFIC can still go ahead and build the new plant, but the expected annual after-tax cash flows would be only $200,000 in perpetuity starting in year two. VFIC's cost of capital is 10%.

Given the above information, what is the value of the option to sell the prototype?

C. VFIC Industries 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 cost $500,000 and last for one year. The 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 VFIC will invest $3 million to build a plant immediately that will generate expected annual after-tax cash flows of $400,000 in perpetuity starting in year two. If the test marketing is not successful, VFIC can still go ahead and build the new plant, but the expected annual after-tax cash flows would be only $200,000 in perpetuity starting in year two. VFIC's cost of capital is 10%.