Nebraska Instruments (NI) is considering a project that has an up-front cost at t = 0 of $1,500,000. The project's subsequent cash flows critically depend on whether its products become the industry standard. There is a 75 percent chance that the products will become the industry standard, in which case the project's expected cash flows will be $500,000 at the end of each of the next seven years (t = 1 ... 7). There is a 25 percent chance that the products will not become the industry standard, in which case the expected cash flows from the project will be $50,000 at the end of each of the next seven years (t = 1 ... 7). NI will know for sure one year from today whether its products will have become the industry standard. It is considering whether to make the investment today or to wait two years until after it finds out if the products have become the industry standard. If it waits a year, the project's up-front cost at t = 1 will remain at $1,500,000. If it chooses to wait, the subsequent cash flows will remain at $500,000 per year if the product becomes the industry standard, and $50,000 per year if the product does not become the industry standard. However, if it decides to wait, the subsequent cash flows will be received only for six years (t=2...7). Assume that all cash flows are discounted at 10 percent.

If NI chooses to wait a year before proceeding, how much will this increase or decrease the project's expected NPV in today's dollars (t = 0), relative to the project's NPV if it proceeds today? (Hints: Increase/Decrease in the project's expected NPV= Expected NPV with real option - Expected NPV without real option)

Question 20 options:

	$86,512
	$616,028
	$229,516
	$135,472
	$75,509