Assignment on investment timing option

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Investment timing option

Sirmans Corp. is considering a new product that would require an investment of $9 million at t = 0. If the new product is well received, then the project would produce after-tax cash flows of $3.75 million at the end of each of the next 3 years (t = 1, 2, 3), but if the market did not like the product, then the cash flows would be only $1.85 million per year. There is a 60% probability that the market will be good. Sirmans Corp. could delay the project for a year while it conducted a test to determine if demand would be strong or weak. The project's cost and expected annual cash flows are the same whether the project is delayed or not; however, the timing of the cash flows would change. (There would be the same number of cash flows-only the cash flows would be extended out one extra year.) The project's WACC is 9%. What is the value of the project after considering the investment timing option?

Reference no: EM132484320

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