Consider an investment opportunity with an option to grow that requires a $4 million investment...
80.2K
Verified Solution
Link Copied!
Question
Finance
Consider an investment opportunity with an option to grow that requires a $4 million investment today. In one year, you will find out whether the project is successful. The probability of being successful in year 1 is 20% and in this case the project generates $1.2 million in revenue per year in perpetuity; otherwise, the project will generate nothing. You have the option to grow --- at the end of year 2, you can double the size of the project on the original terms. The appropriate cost of capital is 12%. Calculate the following two:
I. The NPV of the investment opportunity WITHOUT the option to grow.
II. The value of the option to grow.
The value of the following two is closest to:
a.
I. -$2.0 million; II. $1.3 million.
b.
I. $0.0 million; II. $1.0 million.
c.
I. -$2.0 million; II. $1.0 million.
d.
I. -$1.0 million; II. $1.3 million.
e.
I. $0.0 million; II. $1.3 million.
f.
I. -$1.0 million; II. $1.0 million.
Answer & Explanation
Solved by verified expert
Get Answers to Unlimited Questions
Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!
Membership Benefits:
Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!
