Reference no: EM133149381

Question - Pettijohn Corp. is considering a new product that would require an after-tax investment of $2,000,000 at t = 0. If the new product is well received, then the project would produce after-tax cash flows of $975,000 at the end of each of the next 3 years (t = 1, 2, 3), but if the market did not like the product, then the cash flows would be only $400,000 per year. There is a 65% probability that the market will be good. Pettijohn Corp. could delay the project for a year while it conducted a test to determine if Wemand would be strong or weak. The project's cost and expected annual cash flows are the same whether the project is delayed or not; however, the timing of the cash flows would change. (There would be the same number of cash flows-only the cash flows would be extended out one extra year.) The project's WACC is 10%. What is the value of the project after considering the investment timing option?