Wilson's Antiques is considering a project that has an initial cost today of $10,000.The project has a 2-year life with cash inflows of $6,500 a year.Should Wilson's decide to wait two years to commence this project,the initial cost will increase by 5 percent and the cash inflows will increase to $7,500 a year.What is the value of the option to wait if the applicable discount rate is 10 percent?

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Quizplus · Accepted Answer

NPV_Current = -$10,000 + $6,500[(1 - 1/1.10²)/.10] = $1,280.99NPV_Wait = {(-$10,000 × 1.05)+ $7,500[(1 - 1/1.10²)/.10]}/1.10² = $2,079.77Value of option to wait = $2,079.77 - 1,280.99 = $798.79

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