You are considering launching a new product. The initial investment is $5 million. If successful,...
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You are considering launching a new product. The initial investment is $5 million. If successful, the product is supposed to generate $2 million in net cash flows for 10 years. If unsuccessful, the product is supposed to generate $0.5 million in net cash flows for 10 years.
-The probability of successful product launch is 40% and the probability of unsuccessful product launch is 60%.
-The discount rate for this project is 20%.
-What is the NPV if you have an option to add 4 more projects at the end of the first year if it turns out to be successful (assume you dont have the option to abandon the project when it is unsuccessful)? What is the expansion option value?
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