Consider a capital budgeting project. The project length is one year, the initial outlay at time T=0 is $1,500, and the cost of capital is 10%. The cash flow at T=1 is either $1800 or $2,200, with 0.5 probability each as shown below. Probability Year one (T=1) cash flow 0.5 $1,800 0.5 $2,200 Consider the real option to wait one year before starting the project. Assume that at Year one (T=1) you will know for certain which probability state you are in at T=1. If you use this option, you would pay the initial outlay at T=1 and then receive the cash flow in year T=2.

You should:

a) Take the option because the NPV is greater with the option than without it.

b) Do Not take the option because the NPV is lower with the option than without it.

c) Either choice is the same because the NPV is identical with or without the option.