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d$.$ Now suppose the original $($no abandonment and no additional growth$)$ project could be delayed a year. All the cash flows

would remain unchanged, but information obtained during that year would tell the company exactly which set of demand

conditions existed. Use decision tree analysis to estimate the value of the project if it is delayed by $1$ year. Hint: Discount the

$$10$ million cost at the risk$-$free rate since it is known with certainty. Show two time lines, one for operating cash flows and

one for the cost, then sum their NPVs$.$

Since the NPV from waiting is positive and the NPV from immediate implementation is negative, it makes sense to delay the

decision for a year.d$.$ Now suppose the original $($no abandonment and no additional growth$)$ project could be delayed a year. All the cash

flows would remain unchanged, but information obtained during that year would tell the company exactly which set

of demand conditions existed. Use decision tree analysis to estimate the value of the project if it is delayed by $1$ year.

Hint: Discount the $$10$ million cost at the risk$-$free rate since it is known with certainty. Show two time lines, one for

operating cash flows and one for the cost, then sum their NPVs$.$

WACC$=12\%$

Risk$-$free rate $=6\%$

Decision Tree Analysis: Optg. CFs Future Operating Cash Flows

$($Discount at WACC$)$ NPV this Probability

$0$ Probability $1234$ Scenario x NPV

$30\%$

$40\%$

$30\%$

Expected PV of Future CFs $=$

Decision Tree Analysis: Costs Future Cost of Implementation

$($Discount at Risk$-$Free Rate$)$Cost NPV this Probability

$0$ Probability $1234$ Scenario x NPV

$30\%$

$40\%$

$30\%$

Expected PV of Future CFs $=$

Total NPV $($NPV of Future Operating CF plus

NPV of Future Year $1$ cost of implenting additional project$)=$

Since the NPV from waiting is positive and the NPV from immediate implementation is negative, it makes sense to

delay the decision for a year.