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The firm Exams & Co is considering an investment into a production plant that will require an investment of 2448 and yield the cash flows
The firm Exams & Co is considering an investment into a production plant that will require an investment of 2448 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 (NPVOption). The discount rate for the project is 12%. Year o Years 1-4 Year 4 Years 5-10 Investment-2448 Cash flows 240 (28%) 230 (11%) 476 (32%) 340 (21%) 676 (40%) 592 (68%) Table 1: Investments and cash flows from the production facility without option. Year 4 -2533 (11%) Years 5-10 Year 0 Years 1-4 Investment-2448 Cash flows 240 (28%) 476 (32%) 676 (40%) 872 (11%) 340 (21%) 592 (68%) Table 2: Investments and cash flows from the production facility with option. NPV option =
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