Wilson's Antiques is considering a project that has an initial cost today of €10,000.The project has a two-year life with cash inﬂows of €6,500 a year.Should Wilson's decide to wait one year to
Commence this project, the initial cost will increase by 5% and the cash inﬂows will increase to
€7,500 a year.What is the value of the option to wait if the applicable discount rate is 10%?

Question

Quizplus · Accepted Answer

The value of the option to wait is calculated by comparing the net present value (NPV) of starting the project now versus starting it in one year. Calculate the NPV for both scenarios and find the difference. The NPV of starting now is €1,900.83, and the NPV of starting in one year is €2,907.59. The value of the option to wait is €2,907.59 - €1,900.83 = €1,006.76.

Wilson's Antiques Is Considering a Project That Has an Initial