A project requires an investment of $380 million and has expected annual cash flows of $50 million in perpetuity, starting in one year. The appropriate discount rate for the project is 12%. The company can delay the project by 1 year. After 1 year, the company can invest $380 million to start the project and will know whether demand will be high or low. With high demand, future cash flows will be $70 million in perpetuity, starting in year 2, and $36 million otherwise. The risk-free rate is 3%.

a. What is the NPV of the project ignoring the option to delay (in $ million)?

b. What is the value of the project after one year in the down state without delay (in $ million)?

c. What is the down factor (d) in the binomial option valuation model? Hint: It should be a number between 0 and 1. What is the risk-neutral probability of the up movement?

d. What is the option exercise value in year 1 in the up state if the company delays the start of the project (in $ million)?

e. What is the value of the option to delay (in $ million)?

f. What should the company do? a. Delay the start of the project b. Never start the project c. Cannot say, need more information

d. Start the project now