What is the value of the growth option

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Growth option Martin Development Co. is deciding whether to proceed with Project X. The cost would be $10 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, that would require $9 million outlay at the end of Year 2. Project Y would then be sold to another company at a price of $21 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? Round your answer to two decimal places. If the answer is negative, use minus sign. b. What is X's NPV considering the growth option? Round your answer to two decimal places. If the answer is negative, use minus sign. c. What is the value of the growth option? Round your answer to two decimal places. If the answer is negative, use minus sign.

Reference no: EM13275343

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