Wilson's Antiques is considering a project that has an initial cost today of $14,000.The project has a life of 2 years with cash inflows of $9,500 a year.Should Wilson's decide to wait 2 years to commence this project,the initial cost will increase by 3 percent and the cash inflows will increase to $11,000 a year.What is the value of the option to wait if the applicable discount rate is 12 percent?

Question

Quizplus · Accepted Answer

NPV _Current = -$14,000 + $9,500[(1 - 1 / 1.12²)/ 0.12] = $2,055.48 NPV _Wait = {(-$14,000 × 1.03)+ $11,000[(1 - 1 / 1.12²)/ 0.12]} / 1.12² = $3,324.75 Value of option to wait = $3,324.75 - $2,055.48 = $1,269.26

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