Question
HTG companys research scientists can begin an exciting new project at a cost of $10m now, after which theres a: 70% chance that cash flows
HTG companys research scientists can begin an exciting new project at a cost of $10m now, after which theres a: 70% chance that cash flows will be $1m per year forever, starting in 5 years (t=5). This is the State A of the world. 20% chance that cash flows will be $3m per year forever, starting in 5 years (t=5). This is the State B of the world. 10% chance of a major breakthrough in which case the cash flows will be $20m per year forever starting in 5 years (t=5), or the project can be expanded by investing another $10m (at t=5) which is expected to give cash flows of $60m per year forever, starting at year 9 (t=9). This is the C state of the world. The firm's cost of capital is 10% pa. What's the present value (at t=0) of the option to expand in year 5?
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