Lindley Corp.is considering a new product that would require an investment of $10.5 million now,at t = 0.If the new product is well received,then the project would produce after-tax cash flows of $5.3 million 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 $2.6 million per year.There is a 50% probability that the market will be good.The firm could delay the project for a year while it conducts a test to determine if demand is likely to be strong or weak.The project's cost and expected annual cash flows would be the same whether the project is delayed or not.The project's WACC is 9.2%.What is the value (in thousands)of the project after considering the investment timing option? Do not round intermediate calculations.
?
A) $1,248
B) $985
C) $1576
D) $1,445
E) $1,313

Question

Quizplus · Accepted Answer

11ea856c_8b89_142d_9aec_470d45ab1e8a_TB1222_00 11ea856c_8b89_142e_9aec_39116027365b_TB1222_00 11ea856c_8b89_3b3f_9aec_d1e69c230672_TB1222_00 *There is a 50% probability of a negative test;hence,no investment and thus a $0 NPV and a 50% probability of a positive NPV.The expected NPV is a weighted average of the two.