You are given the following information on the best guess of related outcomes for a project.
The initial cash outlay for developing and market testing the product over the next year is $70 M.
Following the test, the company will spend another $400M to put the productive capabilities in place at the END of the year.
If the test is successful, which is expected to have a probability of 0.8, the expected annual cash flows will be $150M for five years.
If the test fails, the expected annual cash flows will be $50M for five years. The discount rate is 12%.
(a) Compute the NPV of this project at time 0 assuming that the project will be implemented regardless of the outcome of the test. Given that the value at the END of the testing year of the 5-year $150M annuity is $540.72M, and that of the 5-year $50M annuity is $180.24M.