Question

Your firm has an opportunity to invest in a project that costs $800 and you expect it to return two payments of 500 per year. The interest rate of the project is 10%. The current NPV of project is $67.77.

You also have the option to wait one year to invest the $800. If you wait you will know more and can revise your expectations such that you either expect to return two payments of $750 with a probability of 0.1 or alternatively two payments of $300 (the probability of this is equal to 1 minus the probability of the first result). The interest rate of the project is still 10%.

What is the current present value of the NPV if they choose to wait?

Answer 1

If we wait for 1 year
Initial cost in year 1	800	$
Interest rate	10%
	Probability		Expected cashflow
Year	10%	90%
1	750	300	345
2	750	300	345
	a	b	a*b
Year	Cashflow	PV factor 10% [1/(1+r)]^n	PV
1	(800.00)	0.909	(727.27)
2	345.00	0.826	285.12
3	345.00	0.751	259.20
	Current NPV of project		(182.95)
Conclusion
Current NPV of project if they choose to wait is -182.95 $
So they should not wait for 1 year
Project should start immediately since it have an NPV of 67.77$
Notes:
NPV = Discounted inflow - Initial investment
Rate of return is 10%