Excel Online Structured Activity: Investment Timing Option

All American Telephones Inc. is considering the production of a new cell phone. The project will require an investment of $$16$ million. If the phone is well received, the project will produce cash flows of $$11$ million a year for $3$ years, but if the market does not like the product, the cash flows will be only $$1$ million per year. There is a $50\%$ probability of both good and bad market conditions. All American can delay the project a year while it conducts a test to determine whether demand will be strong or weak. The delay will not affect the dollar amounts involved for the project$$s investment or its cash flows$$only their timing. Because of the anticipated shifts in technology, the $1-$year delay means that cash flows will continue only $2$ years after the initial investment is made. All American$$s WACC is $7\%.$ The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the question below.

Open spreadsheet

What action do you recommend? Do not round intermediate calculations. Round your answers to the nearest dollar. Use a minus sign to enter negative values, if any.

NPV without waiting: $ fill in the blank $2$

NPV of waiting $1$ year: $ fill in the blank $3$

You recommend CFs if product poorly received $$1,000,000$

Probability of good market conditions $50\mathrm{.}00\%$

Probability of bad market conditions $50\mathrm{.}00\%$

Project life $($in years$)3$

Wait $1$ Year To Do Project:

Investment cost $$16,000,000$

CFs if product well received $$11,000,000$

CFs if product poorly received $$1,000,000$

Probability of good market conditions $50\mathrm{.}00\%$

Probability of bad market conditions $50\mathrm{.}00\%$

Project life $($in years$)2$

NPV of Doing Project Today

$0123$

Good Market Conditions:

Probability $50\mathrm{.}00\%$

Investment cost $-$$$16,000,000$

Cash inflows $$11,000,000$ $$11,000,000$ $$11,000,000$

Formulas

Net present value, good market #N$/$A

Bad Market Conditions:

Probability $50\mathrm{.}00\%$

Investment cost $-$$$16,000,000$

Cash inflows $$1,000,000$ $$1,000,000$ $$1,000,000$

Net present value, bad market #N$/$A

Expected NPV of doing project today #N$/$A

NPV of Waiting $1$ Year to Do Project

$0123$

Good Market Conditions:

Probability $50\mathrm{.}00\%$

Investment cost $-$$$16,000,000$

Cash inflows $$11,000,000$ $$11,000,000$

Net present value, good market #N$/$A

Bad Market Conditions:

Probability $50\mathrm{.}00\%$

Investment cost $-$$$16,000,000$

Cash inflows $$1,000,000$ $$1,000,000$

Net present value, bad market #N$/$A

Expected NPV today of waiting $1$ year #N$/$A

What action is recommended? #N$/$A