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Your firm is considering an investment that will generate cash flows for the next two years. The cash flows are risky and their possible values
Your firm is considering an investment that will generate cash flows for the next two years. The cash flows are risky and their possible values are provided in the following table:
Year | Good Market | Bad Market |
1 | $15M | $8M |
2 | $17M | $12M |
Assume that the cost of capital of the project is 14%, and that the project costs $18M. The market is equally likely to be in a good and in a bad state each year
Compute the NPV of the project? Should the project be undertaken?
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