Question 9 5 pts A potential new project would cost $1000 today. The project wou

Question

Question 9 5 pts A potential new project 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) $603 per year, with 50% probability, or 2) $0 per year, with 50% probability. The cost of capital is 10%. 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 would occur for the next two years). The expected NPV of the project, considering the option to delay the decision one year, is $.. Rounding and Formatting: Do not enter a dollar sign in your response. Do not round any intermediate work, but round your final answer to 2 decimal places. Example: If your answer is $12.34567, you should enter 12.35 as your response. If your answer is negative, be sure to enter a negative sign preceding the number Margin of error for correct responses: +/- $.05.

Explanation / Answer

Considering that firm has option to wait a year before investing, it will not invest in case of worst case scenario as there shall be loss.

We shall calculate NPV after a year as below:

NPV is calculated using excel formula:
=-1000+NPV(0.1,603,603)

Now we need to discount the cash flow back to a year:
=46.53/(1.1)=$42.30
This is the expected NPV

Year Cash flow 0 -1000 1 603 2 603 NPV 46.52893

Related Questions

Navigate

• Browse (All)
• Browse Q
• Subjects

---

---

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