{"id":8038,"date":"2021-10-14T22:05:15","date_gmt":"2021-10-14T22:05:15","guid":{"rendered":"https:\/\/assignmenttutors.net\/blog\/lindley-corp-is-considering-a-new-product-that-would-require-an\/"},"modified":"2022-11-10T03:32:09","modified_gmt":"2022-11-10T03:32:09","slug":"lindley-corp-is-considering-a-new-product-that-would-require-an","status":"publish","type":"post","link":"https:\/\/assignmenttutors.net\/blog\/lindley-corp-is-considering-a-new-product-that-would-require-an\/","title":{"rendered":"Lindley corp. is considering a new product that would require an"},"content":{"rendered":"<div>\n<p><strong>Problem #1: <\/strong>Tutor.com is considering a plan to develop an online finance tutoring package that has the cost and revenue projections shown below.\u00a0 One of Tutor&#8217;s larger competitors, Online Professor (OP), is expected to do one of two things in Year 5:\u00a0 (1) develop its own competing program, which will put Tutor&#8217;s program out of business, or (2) offer to buy Tutor&#8217;s program if it decides that this would be less expensive than developing its own program.\u00a0 Tutor thinks there is a 35% probability that its program will be purchased for $6 million and a 65% probability that it won&#8217;t be bought, and thus the program will simply be closed down with no salvage value.\u00a0 What is the estimated net present value of the project (in thousands) at a WACC = 10%, giving consideration to the potential future purchase?<\/p>\n<p>&nbsp;<\/p>\n<p>WACC = 10.0%\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 1\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 2\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 3\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 4\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 5<\/p>\n<p>Original project:\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 -$3,000\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 $500\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 $500\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 $500\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 $500\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 $500<\/p>\n<p>&nbsp;<\/p>\n<p>Future\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Prob.<\/p>\n<p>Buys\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 35%\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 $6,000<\/p>\n<p>Doesn&#8217;t buy\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 65%\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 $0<\/p>\n<p>&nbsp;<\/p>\n<p><strong>\u00a0<\/strong><\/p>\n<p><strong>Problem #2: <\/strong>Lindley Corp. is considering a new product that would require an investment of $10 million now, at t = 0.\u00a0 If the new product is well received, then the project would produce after-tax cash flows of $5 million at the end of each of the next 3 years (t = 1, 2, 3), but if the market did not like the product, then the cash flows would be only $2 million per year.\u00a0 There is a 50% probability that the market will be good.\u00a0 The firm could delay the project for a year while it conducts a test to determine if demand is likely to be strong or weak.\u00a0 The project&#8217;s cost and expected annual cash flows would be the same whether the project is delayed or not.\u00a0 The project&#8217;s WACC is 10.0%.\u00a0 What is the value (in thousands) of the project after considering the investment timing option?<\/p>\n<p><strong>\u00a0<\/strong><\/p>\n<p><strong>Problem #3: <\/strong>Diplomat.com is considering a project that has an up-front cost of $3 million and is expected to produce a cash flow of $500,000 at the end of each of the next 5 years.\u00a0 The project\u2019s cost of capital is 10%.What is the project\u2019s NPV?<\/p>\n<p>&nbsp;<\/p>\n<p><strong>Problem #4: <\/strong>Diplomat.com is considering a project that has an up-front cost of $3 million and is expected to produce a cash flow of $500,000 at the end of each of the next 5 years.\u00a0 The project\u2019s cost of capital is 10%. (See Problem above). If Diplomat goes ahead with this project today, it will obtain knowledge that will give rise to additional opportunities 5 years from now (at t = 5).\u00a0 The company can decide at t = 5 whether or not it wants to pursue these additional opportunities.\u00a0 Based on the best information available today, there is a 35% probability that the outlook will be favorable, in which case the future investment opportunity will have a net present value of $6 million at t = 5.\u00a0 There is a 65% probability that the outlook will be unfavorable, in which case the future investment opportunity will have a net present value of -$6 million at t = 5.\u00a0 Diplomat.com does not have to decide today whether it wants to pursue the additional opportunity.\u00a0 Instead, it can wait to see what the outlook is.\u00a0 However, the company cannot pursue the future opportunity unless it makes the $3 million investment today.\u00a0 What is the estimated net present value of the project, after consideration of the potential future opportunity?<\/p>\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>Problem #1: Tutor.com is considering a plan to develop an online finance tutoring package that has the cost and revenue projections shown below.\u00a0 One of Tutor&#8217;s larger competitors, Online Professor (OP), is expected to do one of two things in Year 5:\u00a0 (1) develop its own competing program, which will put Tutor&#8217;s program out of [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[18,31],"tags":[],"class_list":["post-8038","post","type-post","status-publish","format-standard","hentry","category-accounting","category-homework-help"],"_links":{"self":[{"href":"https:\/\/assignmenttutors.net\/blog\/wp-json\/wp\/v2\/posts\/8038","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/assignmenttutors.net\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/assignmenttutors.net\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/assignmenttutors.net\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/assignmenttutors.net\/blog\/wp-json\/wp\/v2\/comments?post=8038"}],"version-history":[{"count":2,"href":"https:\/\/assignmenttutors.net\/blog\/wp-json\/wp\/v2\/posts\/8038\/revisions"}],"predecessor-version":[{"id":104371,"href":"https:\/\/assignmenttutors.net\/blog\/wp-json\/wp\/v2\/posts\/8038\/revisions\/104371"}],"wp:attachment":[{"href":"https:\/\/assignmenttutors.net\/blog\/wp-json\/wp\/v2\/media?parent=8038"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/assignmenttutors.net\/blog\/wp-json\/wp\/v2\/categories?post=8038"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/assignmenttutors.net\/blog\/wp-json\/wp\/v2\/tags?post=8038"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}