How valuable is the growth option

Reference no: EM13280274

Martin Development Co. is deciding whether to proceed with Project X. The cost would be $9 million in Year 0. There is a 50% chance that X would be hugely successful and would generate annual after-tax cash flows of $6 million per year during Years 1, 2, and 3. However, there is a 50% chance that X would be less successful and would generate only $1 million per year for the 3 years. If Project X is hugely successful, it would open the door to another investment, Project Y, which would require an outlay of $10 million at the end of Year 2. Project Y would then be sold to another company at a price of $20 million at the end of Year 3. Martin's WACC is 11%.

A. If the Company does not consider real options, what is Project X's NPV?
B. What is X's NPV considering the growth option?
C. How valuable is the growth option?

Reference no: EM13280274

Questions Cloud

Calculate the bond current price : A $1,000 corporate bond has an 8% annual coupon with semi-annual payments and compounding, with 10 years to maturity. The current market for a similar bond is 7% annual yield for a bond with similar risks.

Find which bucket holds more water : While on a camping trip, you would like to carry water from the lake to your campsite. find Which bucket holds more water

Which security has a higher effective annual interest rate : Which security has a higher effective annual interest rate?

Determine the force is exerted by the biceps muscle : Most of the motion generated by joints in the human body are examples of levers. An example of a third class lever is the forearm; what force is exerted by the biceps muscle

How valuable is the growth option : Project Y, which would require an outlay of $10 million at the end of Year 2. Project Y would then be sold to another company at a price of $20 million at the end of Year 3. Martin's WACC is 11%.

Explain the volume of the tires has increased : Starting out on a road trip you inflate your tires on your car to the recommended pressure of 46.5 psi on a day when the temperature is -5.0 C. Upon arrival at your destination, the temperature is now 28.0 C/ The volume of the tires has increased ..

Design a wafer structure for the laser : Graded-index separate confinement double heterostructure (GRIN-SCH) InGaAs/GaAs lasers with various cavity lengths were tested in the lab. The 100m wide oxide strip lasers consists of two pairs of 10nm In0.2Ga0.8As quantum-well (QW).

Identify the type of food service : Identify the type of food service and describe two attributes that support your identification.

Explain sodium chloride affect the hydrated cobalt ion : How would the addition of sodium chloride affect the hydrated cobalt(II) ion equilibrium? Explain using Le Chatelier's principle

User Account

All Pages