Example 2 Your company is deciding whether to expand production in the UK. The expansion will generate cash flows for the next 10 years starting next year and costs $65M when expansion begins. Assume a discount rate of 10 percent per year. There is a 50 percent chance the facility will generate high or low cash flows. There is a 30 percent chance that the UK will have a strong economy, and 70 percent chance the economy will be weak 0 0 o High cash flows, good economy = $20M/year High cash flows, bad economy = $15M/year Low cash flows, good economy = = $10M/year Low cash flows, bad economy = $5M/year Example 2. a) What is the NPV of the project if you invest today? b) What is the NPV of the project today if economy is good? What about bad? c) If you wait a year, you will know whether the project will have high cash flow or low cash flow (the chance of success is still 50%), but you will still be uncertain about the economy upon expansion of the facility. What is the NPV at t=1 if cash flows are high or low? d) What is the NPV today of the project if you decide to wait for a year? e) What is the value of the option to wait