You are considering a project that has been assigned a discount rate of 12 percent.If you start the project today,you will incur an initial cost of $280 and will receive cash inflows of $350 a year for 3 years.If you wait 1 year to start the project,the initial cost will rise to $420 and the cash flows will increase to $385 a year for 3 years.What is the value of the option to wait?

Question

Quizplus · Accepted Answer

NPV _Current = -$280 + $350[(1 - 1 / 1.12³)/ 0.12] = $560.64 NPV _Wait= {-$420 + $385[(1 - 1 / 1.12³)/ 0.12]} / 1.12 = $450.63 Value of option to wait = $450.63 - $560.64 = -$110.01

You Are Considering a Project That Has Been Assigned a Discount