a. A company is considering introducing a new product in the U.S.. The product will be initially introduced only in Texas, California, and New York. The cost of this limited introduction is $250 million. After performing an analysis of the expected cash flow from the limited introduction, you have determined the present value is $200 million.
Determine the NPV of the limited introduction:
b. If the introduction is successful, the company could go ahead with a full-scale introduction to the entire U.S. market with an additional investment of $750 million any time over the next 3 years. The NPV of the full-scale introduction is estimated to be $550 million, however there is a lot of uncertainty in the estimation due to existing market conditions. The standard deviation of the industry is 40%. If the risk-free rate is 2 percent, what is the value of the option to expand?Note 1: use the following dates: 3/2/2018 to 3/2/2021
c. What is the NPV of the project with the option to expand?