An initial estimate of the investment is as follows:

 

The project has a 10-year life, with the free cash flow equal to $200 million next year. The free cash flows grow at 3% every year until the end of the project.

The initial investment is $1 billion.

The cost of capital of the project is 10%.

 

This investment is considered as a option to expand the operations to other Southern Africa countries ("expansion option"). The expansion analysis is as follows:

 

You have 10 years of exclusive rights for this expansion (following the original investment).

The expansion costs $3 billion.

The expansion generates free cash flows of $10 million for 20 years.

There is a uncertainty about this expansion. The variance is 50%.

The cost of capital of the project is the same 10%. The risk-free rate is 6%.

Required:

1. Estimate the NPV of the original investment.

2. Estimate the value of the expansion option.