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McAdams Technologies is evaluating a new project (called Project A) that would cost $7 million at...

McAdams Technologies is evaluating a new project (called Project A) that would cost $7 million at t = 0. There is a 50% chance that the project will be hugely successful and generate annual after-tax cash flows of $5 million during Years 1, 2, and 3. However, there is a 50% chance that the project will be less successful and generate only $2 million for each of the 3 years. If the project is hugely successful, it will open the door to another investment (called Project B) that would require a $10 million outlay at the end of Year 2. This new investment would then be sold to another company at a price of $20 million at the end of Year 3. McAdams’ WACC is 10%.

(1) What is the project's expected NPV after taking this growth option into account?

(2) What is the value of the growth option?

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SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

jeff jeffy answered 1 year ago
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