Problem: Your company is considering the following project and has a cost of capital of 15%.
A. What is the Net Present Value of the initial project?
B. What is the Net Present Value of the expansion option?
C. Would you recommend the project? Why?
Initial Project:
Cost: $50,000
ATCFs of $9,000 each year for five years.
Expansion Option End of Fifth Year:
Probability of Expansion Option: 75%
Cost: $40,000
ATCFs of $29,000 each year for five years.