In the previous problem, suppose the scale of the project can be doubled in one year in

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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 be desirable only if the project were a success. This implies that if the project is a success, projected sales after expansion will be 18,200. 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 6,500 units per year at $43 net cash flow apiece for the next 10 years. In other words, the annual operating cash flow is projected to be $43 × 6,500 = $279,500. The relevant discount rate is 16 percent and the initial investment required is $980,000.

Discount Rate
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal...
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Corporate Finance

ISBN: 978-1259918940

12th edition

Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe, Bradford Jordan

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