Stephens Construction is considering an investment in a proposed project. Rather than making the investment today, the company wants to wait a year to collect additional information about the project. It will not have to invest any cash flows until it decides to make the investment. If it waits a year, there is a 25 percent chance the project's expected NPV one year from today will be $12 million, a 50 percent chance that the project's expected NPV one year from now will be $5 million, and a 25 percent chance that the project's expected NPV one year from now will be -$8 million. All expected cash flows are discounted at 12 percent. What is the expected NPV in today's dollars, if the company chooses to wait a year before deciding whether to make the investment?

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The Answer of Stephens Construction is considering an investment in a proposed project. Rather than making the investment today, the company wants to wait a year to collect additional information about the project. It will not have to invest any cash flows until it decides to make the investment. If it waits a year, there is a 25 percent chance the project's expected NPV one year from today will be $12 million, a 50 percent chance that the project's expected NPV one year from now will be $5 million, and a 25 percent chance that the project's expected NPV one year from now will be -$8 million. All expected cash flows are discounted at 12 percent. What is the expected NPV in today's dollars, if the company chooses to wait a year before deciding whether to make the investment?

Stephens Construction Is Considering an Investment in a Proposed Project