Sally Rubber Co. is looking at investing in a production facility that will require an initial investment of $500,000. The facility will have a three-year useful life, and it will not have any salvage value at the end of the project’s life. If demand is strong, the facility will be able to generate annual cash flows of $250,000, but if demand turns out to be weak, the facility will generate annual cash flows of only $125,000. Sally Rubber Co. thinks that there is a 50% chance that demand will be strong and a 50% chance that demand will be weak.
If the company uses a project cost of capital of 13%, what will be the expected net present value (NPV) of this project?
-$60,148
-$42,963
-$57,284
-$40,099
