Question

Suppose, if the best case scenario starts to unfold, that you will allow the project to run through Year 10 (instead of stopping after Year 7) with all of the growth continuing through Year 10. If this happens, you’ll have the opportunity to sell off the investment for $5m in 10 years. a. What is the best case scenario NPV now? b. Does the option to expand change your answer to whether you should pursue the project (given the probabilities in #7)? Explain/show. c. What is the value of the option to expand? (in dollars) Explain/show

Answer 1

A) what is the best case scenario NPV

In case of calculating net present value(NPV) we use the lowest possible discount rate, highest possible growth rate, lowest possible tax rate, etc.

In the given scanerio

Assuming 10% rate

P. V. factor

for 10 years = 0.909+0.826+0.751+0.683+0.621+0.564+0.513+0.466+0.424+0.385

= 6.142

Now NPV = 0.814 M

Let us see P.V Also in simple steps

PV IF

= 1/ (1+10%)

= 1/(1.1)10 for 10 years

=2.59