Winters Corp.is considering a new product that would require an investment of $22 million now,at t = 0.If the new product is well received,then the project would produce after-tax cash flows of $11.0 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 $4 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,but it would have to incur costs to obtain this timing option.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 10.0%.What is the value (in thousands)of the option to delay the project? Do not round intermediate calculations.
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A) $2,678
B) $1,826
C) $2,556
D) $2,191
E) $2,434

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? 11ea856c_8b89_8960_9aec_ed49966166b6_TB1222_00 11ea856c_8b89_8961_9aec_cb558bf26e53_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.The value of the timing option is the difference between the expected value of the project with the timing option and without this option.However,if the NPV of the project without the option is negative,then the value of the option is simply the NPV of the project with the option (because the project wouldn't be undertaken otherwise).Value of timing option = Value with option ? Value w/o option = $2,434
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