Companies often come across projects that have positive NPV opportunities in which the company does not invest. Companies must evaluate the value of the option to invest in a new project that would potentially contribute to the growth of the firm. These options are referred to as growth options.

Consider the case of Sunny Co.:

Sunny Co. is considering a three-year project that will require an initial investment of $55,000. It has estimated that the annual cash flows for the project under good conditions will be $50,000 and $9,000 under bad conditions. The firm believes that there is a 60% chance of good conditions and a 40% chance of bad conditions.

If the firm is using a weighted average cost of capital of 13%, the expected net present value (NPV) of the project is -------. (Note: Round your answer to the nearest whole dollar.)

Sunny Co. wants to take a potential growth option into account when calculating the projects expected NPV. If conditions are good, the firm will be able to invest $2,000 in year 2 to generate an additional cash flow of $15,000 in year 3. If conditions are bad, the firm will not make any further investments in the project.

Using the information from the preceding problem, the expected NPV of this projectwhen taking the growth option into account is _____ . (Note: Round your answer to the nearest whole dollar.)

Sunny Co.s growth option is worth _______

2.

Consider the following case of Happy Turtle Transportation Company:

Suppose Happy Turtle Transportation Company is considering a project that will require $200,000 in assets.

	The project is expected to produce earnings before interest and taxes (EBIT) of $55,000.
	Common equity outstanding will be 15,000 shares.
	The company incurs a tax rate of 35%.

If the project is financed using 100% equity capital, then Happy Turtle Transportation Companys return on equity (ROE) on the project will be . In addition, Happy Turtles earnings per share (EPS) will be .

Alternatively, Happy Turtle Transportation Companys CFO is also considering financing the project with 50% debt and 50% equity capital. The interest rate on the companys debt will be 13%. Because the company will finance only 50% of the project with equity, it will have only 7,500 shares outstanding. Happy Turtle Transportation Companys ROE and the companys EPS will be if management decides to finance the project with 50% debt and 50% equity.

Typically, using financial leverage will a projects expected ROE.