Input Area: Probability Without expansion With expansion Recession 0.30 $ 11,000
ID: 2669903 • Letter: I
Question
Input Area:
Probability Without
expansion With
expansion
Recession 0.30 $ 11,000,000 $ 13,000,000
Normal 0.50 $ 17,500,000 $ 24,000,000
Expansion 0.20 $ 22,500,000 $ 28,500,000
Face value of debt $ 14,000,000
Cost of expansion $ 4,500,000
What is the Expected value of firm
Without expansion
With expansion
Expected NPV $ 550,000
Explanation / Answer
Economic Growth Probability Without Expansion With Expansion Recession 0.30 $ 11,000,000 $ 13,000,000 Normal 0.50 $ 17,500,000 $ 24,000,000 Expansion 0.20 $ 22,500,000 $ 28,500,000 Expected value without expansion =0.3*11+0.5*17.5+0.2*22.5= $16.5 million Expected value with expansion =0.3*13+0.5*24+0.2*28.5-Cost of financing =(21.6-4.5)million = $ 17.1 million