Question
We are examining a new project. Suppose we think it is likely that expected sales will be either 9,500 units if the project is a
We are examining a new project. Suppose we think it is likely that expected sales will be either 9,500 units if the project is a success or revised downward to 3,000 units if the project is not a success. We expect to $63 net cash flow apiece for the next 10 years. The relevant discount rate is 14 percent, and the initial investment required is $1,600,000. The size of the project can be expanded and increased by twice of its original size in year 1 if it turns out to be a success. Assume that success and failure are equally likely.
a) What is the expected NPV of the project?
b) What is the value of the expansion option?
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