Question
The firm Exams & Co is considering an investment into a production plant that will require an investment of 3953 and yield the cash flows
The firm Exams & Co is considering an investment into a production plant that will require an investment of 3953 and yield the cash flows shown in the first table below. Cash flows will occur with the probabilities shown in parentheses. If demand is strong in the first years, Exams & Co may scale up the investment in year 4 and returns in the years after that will increase as well. The cash flows from the project including the upscaling option are shown in the lower table. Please compute the difference in NPVs between the investments with and without investment option (NP VOption). The discount rate for the project is 14%. Year 0 Years 1-4 Year 4 Years 5-10 Investment 3953 Cash flows 188 (25%) 213 (24%) 298 (25%) 422 (26%) 606 (50%) 597 (50%) Table 3: Investments and cash flows from the production facility without option. Year 0 Years 1-4 Year 4 Years 5-10 Investment 3953 2784 (24%) Cash flows 188 (25%) 1163 (24%) 298 (25%) 422 (26%) 606 (50%) 597 (50%) Table 4: Investments and cash flows from the production facility with option. NP VOption =
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