At what cost of expanding would there be

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Question - Your firm is thinking of expanding. If you invest? today, the expansion will generate $8 million in FCF at the end of the? year, and will have a continuation value of either $145 million? (if the economy? improves) or $54 million? (if the economy does not? improve). If you wait until next year to? invest, you will lose the opportunity to make $8 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 4%?, and the? risk-neutral probability that the economy improves is 38%. Assume the cost of expanding is the same this year or next year.

a. If the cost of expanding is $85 ?million, should you do so? today, or wait until next year to? decide?

b. At what cost of expanding would there be no difference between expanding now and? waiting? To what profitability index does this? correspond?

Reference no: EM132950910

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