Games Unlimited Inc.is considering a new game that would require an investment of $21.0 million.If the new game is well received,then the project would produce cash flows of $9.5 million a year for 3 years.However,if the market does not like the new game,then the cash flows would be only $6.8 million per year.There is a 50% probability of both good and bad market conditions.The firm could delay the project for a year while it conducts a test to determine if demand would be strong or weak.The project's cost and expected annual cash flows would be the same whether the project is delayed or not.If the WACC is 9.6%,what is the value (in thousands)of the investment timing option? Do not round intermediate calculations.
?
A) $1,274
B) $1,083
C) $1,592
D) $1,019
E) $1,147

Question

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? 11ea856c_8b89_d782_9aec_911f9592a9e6_TB1222_00 11ea856c_8b89_fe93_9aec_df8dd3ec0779_TB1222_00 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).Option value = NPV with option ? NPV w/o option = $1,274