In the previous problem, suppose the scale of the project can be doubled in one year in
Question:
In the previous problem, suppose the scale of the project can be doubled in one year in the sense that twice as many units can be produced and sold. Naturally, expansion would only be desirable if the project were a success. This implies that if the project is a success, projected sales after expansion will be 28,000. Again assuming that success and failure are equally likely, what is the NPV of the project? Note that abandonment is still an option if the project is a failure. What is the value of the option to expand?
Data from Previous Problem
We are examining a new project. We expect to sell 14,000 units per year at $64 net cash flow apiece for the next 10 years. In other words, the annual operating cash flow is projected to be $64 × 14,000 = $896,000. The relevant discount rate is 11 percent, and the initial investment required is $3.95 million.
Step by Step Answer:
Corporate Finance Core Principles And Applications
ISBN: 9781260571127
6th Edition
Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe, Bradford Jordan