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XYZ Corporation has a 4-year project with a scale option that will postition it to increase cash flows by 1.4 times in the 3rd and 4th years of the project. The firm's cost of capital is 12%.
Cash flows without the scale option:
CF0 -2,000,000
CF1 700,000
CF2 600,000
CF3 600,000
CF4 500,000
1. What is the value of the scale option?
A. $5,782.10
B. $151,856.49
C. $297,929.88
D. Cannot be determined from the information provided
2. Which of the following statements is true concerning a project with embedded options?
Traditional NPV analysis may understate the value of a project that has embedded options.
Disregarding embedded options is fine provided that a project's NPV is positive.
Embedded options may change both the cash flows and risk associated with a project.
A. I only
B. I and II only
C. I and III only
D. I, II, and III
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