All American Telephones Inc. is considering the production of a new cell phone. The project will require an investment of $13 million. If the phone is well received, the project will produce cash flows of $8 million a year for 3 years, but if the market does not like the product, the cash flows will be only $1 million per year. There is a 50% probability of both good and bad market conditions. All American can delay the project a year while it conducts a test to determine whether demand will be strong or weak. The delay will not affect the dollar amounts involved for the projects investment or its cash flowsonly their timing. Because of the anticipated shifts in technology, the 1-year delay means that cash flows will continue only 2 years after the initial investment is made. All Americans WACC is 9%.

What action do you recommend? Do not round intermediate calculations. Round your answers to the nearest dollar. Use a minus sign to enter negative values, if any.

1. What's the NPV without waiting?

2. What's the NPV of waiting 1 year?

NPV of Doing Project Today Good Manket Conditions: Probability Investment cost Cash inflows Net present value, good market Bad Manket Conditions: Probability Investment cost Cash inflows Net present value, bad market Expected NPV of doing project today \begin{tabular}{|c|c|c|c|} \hline 0 & 1 & 2 & 3 \\ \hline \multirow{2}{*}{\multicolumn{4}{|c|}{\begin{tabular}{r} 50.00% \\ $13.000.000 \end{tabular}}} \\ \hline & & & \\ \hline & $8,000,000 & \begin{tabular}{l} $8,000,000 \\ Formulas \end{tabular} & $8,000,000 \\ \hline & \#N/A & & \\ \hline \end{tabular} 50,00%$13,000,000 $1,000,000$1,000,000$1,000,000 \#N/A \#N/A \begin{tabular}{|c|c|c|c|c|c|} \hline 39 & NPV of Walting 1 Year to Do Prolect & & & & \\ \hline 40 & & 0 & 1 & 2 & 3 \\ \hline 41 & Good Mankel Conditions: & & & & \\ \hline 42 & Probability & 50.00% & & & \\ \hline 43 & Investment cost & & $13,000,000 & & \\ \hline 44 & Cash inflows & & & $8,000,000 & $8,000,000 \\ \hline 45 & & & & & \\ \hline 46 & Net present value, good market & & \#N/A & & \\ \hline 47 & & & & & \\ \hline 48 & Bad Manket Conditions: & & & & \\ \hline 49 & Probability & 50.00% & & & \\ \hline 50 & Investment cost & & $13,000,000 & & \\ \hline 51 & Cash inflows & & & $1,000,000 & $1,000,000 \\ \hline 52 & & & & & \\ \hline 53 & Net present value, bad market & & \#N/A & & \\ \hline 54 & & & & & \\ \hline 55 & Expected NPV today of waiting 1 year & & \#N/A & & \\ \hline \begin{tabular}{l} 56 \\ 57 \end{tabular} & & t & N/A & & \\ \hline 57 & What action is recommended? & +2 & mive & & \\ \hline \end{tabular}