Capital Budgeting Analysis with Real Options

Investment Details:

• Project A:
  • Initial Investment: $4,000,000
  • Annual Cash Inflows: $1,000,000
  • Useful Life: 6 years
  • Option to Expand: $2,000,000
  • Additional Cash Inflows from Expansion: $600,000

Requirements:

• Conduct a capital budgeting analysis for Project A, including the option to expand.
• Calculate the net present value (NPV) with and without the expansion option.
• Present the analysis in a detailed table format.
• Discuss the strategic advantages of considering real options in capital budgeting.