Rosita's is considering a project that has been assigned a discount rate of 12 percent.If the firm starts the project today,it will incur an initial cost of $38,260 and will receive cash inflows of $18,320 a year for three years.If the firm waits one year to start the project,the initial cost will rise to $40,500 and the cash flows will increase to $18,640 a year for three years.What is the value of the option to wait?

Question

Quizplus · Accepted Answer

NPV_Current = -$38,260 + $18,320[(1 - 1/1.12³)/.12] = $5,741.55NPV_Wait = {-$40,500 + $18,640[(1 - 1/1.12³)/.12]}/1.12 = $3,812.62Value of option to wait = $3,812.62 - 5,741.55 = -$1,928.93

Rosita's Is Considering a Project That Has Been Assigned a Discount