What is the npv of the project without growth option

Assignment Help Financial Management

Reference no: EM131558906

Consider an investment opportunity with an option to grow that requires a $10m investment today. In one year we will find out whether the project is successful or not. The probability that the project will generate $1M per year in perpetuity (starting from one year after the investment is made; that is, starting from year 1) is 50%. Otherwise, the project will generate nothing. You can double the size of the project in year 1 if the original project is successful. Proceeding with the extension will require an additional $10m investment which will allow the firm to generate an incremental annual cash flow $1M in perpetuity starting from year 2 (that is, there is no uncertainty about future cash flows from the extended project). Assume the risk-adjusted discount rate is 6% p.a. and do not consider any other factors.

(a) What is the NPV of the project without growth option?

(b) What is the NPV of the project with growth option? (Hint: compute the PV of the growth option first by considering cash flows from the expanded project only)

Reference no: EM131558906

Questions Cloud

What area in the world has the highest child mortality rates : Before you begin this assignment, read through the Home page and the required readings. Specifically, view the Social determinants of health.

Calculate the sharpe ratio and treynor ratio : Calculate the Sharpe ratio, Treynor ratio, M-squared and Jensen's alpha for stock with expected return of 15%, standard deviation of 10% and market beta on 0.9.

Discuss how thomas upham built upon the work of john locke : Discuss how Thomas Upham built upon the work of John Locke and Thomas Reid

What is the company total market value of debt : What is the company’s total book value of debt? What is your best estimate of the aftertax cost of debt? What is the company’s total market value of debt?

What is the npv of the project without growth option : What is the NPV of the project without growth option?

What ethical matters should david consider : What ethical matters should David consider before beginning to see Steve and his wife. What special issues of confidentiality may arise in the case

What ethical matters should barbara consider : Barbara is a licensed professional counselor (LPC) working for a nonprofit social service agency. What ethical matters should Barbara consider as she plans

What things in your own life have made it clear : Discuss each of those illusions and what things (if any) in your own life have made it clear that these attitudes are just illusions

Analyze some facet of a government involvement : You may choose the level of government, the nature of the role or involvement, and how you approach the chosen subject. I want to provide you as much freedom.

User Account

All Pages