The company estimates that a project with an initial investment of -$25 will produce ten positive cash flows of $4.3 a year at the end of each of the next 10 years. The project's cost of capital is 11%. One year from now, there is a 40% chance that the product demand will be low, in which case the yearly cash flows will be only $2.00. One year from now, there is 60% chance that the product demand will be higher, and the yearly cash flows will be $4.8. Should the company exercise investment timing option and wait a year before proceeding? Prove numerically.
The company estimates that a project with an initial investment of -$25 will produce ten positive cash flows of $4.3 a year at the end of each of the next 10 years. The project's cost of capital is 11%. One year from now, there is a 40% chance that the product demand will be low, in which case the yearly cash flows will be only $2.00. One year from now, there is 60% chance that the product demand will be higher, and the yearly cash flows will be $4.8. Should the company exercise investment timing option and wait a year before proceeding? Prove numerically.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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The company estimates that a project with an initial investment of -$25 will produce ten positive cash flows of $4.3 a year at the end of each of the next 10 years. The project's cost of capital is 11%.
One year from now, there is a 40% chance that the product demand will be low, in which case the yearly cash flows will be only $2.00. One year from now, there is 60% chance that the product demand will be higher, and the yearly cash flows will be $4.8.
Should the company exercise investment timing option and wait a year before proceeding? Prove numerically.
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