PLEASE SHOW CALCULATOR INPUTS A project has been assigned a discount rate of 12 percent. If...

PLEASE SHOW CALCULATOR INPUTS

A project has been assigned a discount rate of 12 percent. If the project starts immediately, it will have an initial cost of $480 and cash inflows of $350 a year for three years. If the start is delayed one year, the initial cost will rise to $520 and the cash flows will increase to $385 a year for three years. What is the value of the option to wait?

Expert Solution

Year	Cash flow	PVF@12%	Present value
0	$ -480	1.000	$ (480.00)
1	$ 350	0.893	$ 312.50
2	$ 350	0.797	$ 279.02
3	$ 350	0.712	$ 249.12

Net present value			$360.64

Year	Cash flow	PVF@12%	Present value
0	$ -	1.000	$ -
1	$ -520	0.893	$ (464.29)
2	$ 385	0.797	$ 306.92
3	$ 385	0.712	$ 274.04
4	$ 385	0.636	$ 244.67

Net present value			$361.34

Value of the option to wait =			$ 0.70
			($361.34-$360.64)

jeff jeffy answered 2 years ago

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