You are considering a project that has been assigned a discount rate of 12 percent. If...

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?

O –$20.20

O –$110.01

O –$55.93

O $18.67

O $20.20

Expert Solution

Without waiting

rate	12.0000%
Cash flows	Year	Discounted CF= cash flows/(1+rate)^year
(280.00)	0	(280.00)
350.00	1	312.50
350.00	2	279.02
350.00	3	249.12

NPV = 560.64

after waiting for 1 year

rate	12.0000%
Cash flows	Year	Discounted CF= cash flows/(1+rate)^year
-	0	-
(420.00)	1	(375.00)
385.00	2	306.92
385.00	3	274.04
385.00	4	244.67

NPV = 450.63

value of option = 450.63 - 560.64 = -110.01

jeff jeffy answered 3 years ago

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