A project has a 50/50 chance of generating either a positive cash flow of $1 per year forever or a zero cash flow.The discount rate is 5 percent.If the initial cost is $10,what is the NPV with the option to stop after the first year?

Question

Quizplus · Accepted Answer

The NPV with the option to stop after the first year can be calculated by considering the expected cash flow. With a 50/50 chance of generating either $1 per year forever or $0, the expected cash flow per year is $0.5. Using the formula for a perpetuity, NPV = Cash Flow / Discount Rate, we get NPV = $0.5 / 0.05 = $10. Since the initial cost is $10, the NPV with the option to stop after the first year is $10 - $10 = $0.

A Project Has a 50/50 Chance of Generating Either a Positive