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What is the value of the option to wait

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Reference no: EM132572583

ALC is considering a project that has an initial cost of $1,972. The project's cash flows critically depend on whether a competitor's product gets government approval. There is a 75% chance that the competitor's product will not be approved, and ALC's expected cash flows will be $500 per year for the next seven years. If the competitor is approved (25%), the expected cash flows will be only $30 per year for the next seven years. One y ear from now, ALC will know if they have approval.

ALC is considering whether to make the investment today or to wait a year. If they wait a year, the initial cost will remain at $1,972, the subsequent cash flows will remain at $500 per year if the competitor's product is rejected and $30 per year if they are approved; however, they will only get 6 years of cash flows. The cost of capital is 10%. What is the value of the option to wait (How much will waiting change the NPV in today's dollars)?

Reference no: EM132572583

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