Imagine it is 2015. You are the assistant to the Chief Financial Officer (CFO) of Phord Motor Company, an established manufacturer of conventional autos that is considering entering the self-driving car market with its Phord Model T1 self-driving car.

Unfortunately, forecasts show that the T1 has a negative NPV of $36.52 million. The T1's cash flows are shown in the table below.It can't meet the 18% hurdle rate.

"The T1 just can't make it on financial grounds," the CFO says ," but my gut instinct tells me we should go ahead."

"But you're missing a very important financial advantage," you say to the CFO.

"What?" says the CFO.

"If we don't launch the T1 , " you say," it will probably be too expensive to enter the self-driving car market later when Tesla is firmly established.If we go ahead, we have the opportunity to make follow-on investments which could be extremely profitable.The T1 gives not only its own cash flows, but also a call option to go on with version T2 of the self-driving car."

Cash flows for Model T1 (in millions)

Cash flows for Model T1 (in millions) 2015 2016 2017 2018 2019 2020 After tax cash flows -150 120 140 300 700 0 Required Capital Investment -400 0 0 0 0 Increase in Working Capital 0 -350 -80 -50 100 150 175 Net cash flows -900 40 90 400 850 175 NPV @ 18% =-$36.52 million