1. Quatro, Inc. is considering project X that has an up-front cost of $195,000. The project's subsequent cash flows depend on whether another of its products, Y, is successful. There is a 75% chance that Y will be successful, in which case expected cash flows for X will be $95,000 at the end of each of the next 4 years. There is a 25% chance that Y will not be successful, in which case X's expected cash flows will be $40,000 at the end of each of the next 4 years. Assume that the cost of capital is 10%. Calculate X's NPV.
$68,205
$51,785
$62,552
$106,137
None of the above
2. Darwaine, Inc. is evaluating whether to develop a new product. In deciding whether to go ahead with the project, which of the following items should not be explicitly considered when cash flows are estimated?
If the project is accepted, the company must invest $2 million in working capital. However, all of these funds will be recovered at the end of the project's life.
The company has spent and expensed for tax purposes $3 million on research related to the new detergent. These funds cannot be recovered, but the research may benefit other projects that might be proposed in the future.
The new product will cut into sales of some of the firm's other products.
The project will utilize some equipment the company currently owns but is not now using. A used equipment dealer has offered to buy the equipment.
None of the above.