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What is the value of the option to expand

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Question - A firm is examining a new project. The initial cost is $2,000,000. At year 1 it expects to get a cash inflows equal to $4,500,000 if the project is a success and $1,500,000 if the project is a failure. The probability of success is 50%. The discount rate is 10%.

What is the NPV of the project?

If the project is a success (at year 1) the firm can invest additional $1,000,000 and get two additional cash inflows of $4,500,000 each year during the following two years. What would be the NPV of the project now?

What is the value of the option to expand?

Reference no: EM133058450

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