Value of the option to expand

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We are examining a new project. The annual operating cash flow is projected to be $640,000 for the next 3 years. The discount rate is 16 percent, and the initial investment required is $1,500,000. Assume that success and failure are equally likely, and we could expand the project one year later only if the project is a success. If we expand, the operating cash flows will be doubled in the next 2 years. What is the value of the option to expand? 2 5

A. $1,027,348

B. $442,82

C. $885,64

D. $513,674

E. $551,724

Reference no: EM131058077

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