Value of project after considering investment timing option


Lindley Corp. is considering a new product that will require an investment of $10 million now, at t = 0. If the new product is well received, then the project will produce after-tax cash flows of $5 million at the end of each of the next 3 years (t = 1, 2, 3), but if the market does not like the product, the cash flows will be only $2 million per year. There is a 50% probability that the market will be good. The firm could delay the project for a year while it conducts a test to determine if demand is likely to be strong or weak. The project's cost and expected annual cash flows will be the same whether the project is delayed or not. The project's WACC is 10.0%. What is the value (in thousands) of the project after considering the investment timing option?

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Finance Basics: Value of project after considering investment timing option
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