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Your firm is thinking of expanding. If you invest today, the expansion will generate $9 million in FCF at the end of the year, and
Your firm is thinking of expanding. If you invest today, the expansion will generate $9 million in FCF at the end of the year, and will have a continuation value of either $152 million (if the economy improves) or $50 million (if the economy does not improve). If you wait until next year to invest, you will lose the opportunity to make $9 million in FCF but you will know the continuation value of the investment in the following year (that is, in a year from now you will know what the investment continuation value will be in the following year). Suppose the risk-free rate is 6%, and the risk-neutral probability that the economy improves is 39%. Assume the cost of expanding is the same this year or next year. a. If the cost of expanding is $81 million, should you do so today, or wait until next year to decide? a. If the cost of expanding is $81 million, should you do so today, or wait until next year to decide? The NPV of the expand-now option is $ million. (Round to two decimal places.)
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