Question

Mall Toys Co. is considering a three-year project that will require an initial investment of $43,500. If market demand is strong, Mall Toys Co. thinks that the project will generate cash flows of $28,500 per year. However, if market demand is weak, the company believes that the project will generate cash flows of only $1,500 per year. The company thinks that there is a 50% chance that demand will be strong and a 50% chance that demand will be weak. If the company uses a project cost of capital of 10%, what will be the expected net present value (NPV) of this project? -$5,267 -$6,50 -$6,197 -$5,887 Mall Toys Co. has the option to delay starting this project for one year so that analysts can gather more information about whether demand will be strong or weak. If the company chooses to delay the project, it will have to give up a year of cash flows, because the project will then be only a two-year project. However, the company will know for certain if the market demand will be strong or weak before deciding to invest in it. What will be the expected NPV if Mall Toys Co. delays starting the project? $27,375 $5,421 $2,304 $2,710 What is the value of Mall Toys Co.’s option to delay the start of the project?

Answer 1