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Your company is considering a project that has an up - front cost at Year 0 of $ 5 0 0 , 0 0 0
Your company is considering a project that has an upfront cost at Year of $ and a cost of capital of percent. The project's subsequent cash flows are uncertain. There is a percent chance that the project will be successful and generate a cash flow of $ at the end of each of the next ten years Years while there is a percent chance that the project will not be successful and will only generate cash flows of $ over each of the next five years Years As you can calculate, the net present value of taking on the project today Year is $ If your company delays taking on the project for one year takes it on at Year it can determine whether the cash flows will be $ for the next ten years Years or $ for the next five years Years by doing additional market research. Unfortunately, the market research, penalties for contract delays, and inflation, will raise the price of taking on this project to $ at Year Based on this information, and assuming that the relevant riskadjusted discount rate: remains at percent, determine how much delaying the project will increase or decrease the project's expected NPV in today's dollars Year relative to the project's NPV if it proceeds today.
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