A potential new project for Stampco would cost $1000 today. The project would la

Question

A potential new project for Stampco would cost $1000 today. The project would last 2 years. There are 2 possible scenarios for net cash flows in years 1 and 2: 1) $1040 per year, with 50% probability; or 2) $0 per year, with 50% probability. The cost of capital is 9%. If the firm waits 1 year to make a decision about the project, the uncertainty about the worst-case outcome will be resolved (i.e. the firm will know whether the best case or worst case outcome will occur for the next two years). The expected NPV of the project, considering the option to delay the decision one year, is $_______.

Explanation / Answer

Year Cash flow PVF@9% Present value 0 $               -   1.000 $                          -   1 $      (1,000) 0.917 $               (917.43) 2 $        1,040 0.842 $                 875.35 3 $        1,040 0.772 $                 803.07 Net present value $                 760.99

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.