• Suppose you are considering building a factory that produces generic steel chains. Price of a typical chain right now is $175.
• Next year the price could go up to $200 or go down to $160. Each is equally likely. The conditions allow you wait one year and see whether the price goes up or down and then invest only if price is up.
• Cost of factory is $900 today and it can be built in a few days since you have infrastructure in place. So the cash flow starts in the same year.
• Should you invest today or wait for next year? WACC is 12%.