Question
Your company is deciding whether to invest in a new machine. The new machine will increase CF by $3.5 million per calendar year. You believe
Your company is deciding whether to invest in a new machine. The new machine will increase CF by $3.5 million per calendar year. You believe the technology used in the machine has 5-year life (so, no matter when you purchase it it will be obsolete 5 years from today, not the day your investment starts). The machine is currently priced at $13 million. The price of the machine will decline by $2.5 million per year until it reaches $5.5 million, where it will remain. If your required return is 10%, should you purchase the machine? If so, when? Please calculate the option value if delayed by 1 year ,2, 3, and 4 years.
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