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Finance - Option to wait

You are considering a project which has been assigned a discount rate of 8%. If you start the project today, you will incur an initial cost of $480 and will receivecash inflows of $350 a year for three years. If you wait one year to start the project, the initial cost will rise to $520 and the cash flows will increase to $385 ayear for three years. What is the value of the option to wait? (5 points)
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Answer #1

for now :

I = $480

cash inflow : $350 for 3 yrs.

so Principle Value cost = 480 - 350/(1.08)3= $202

if wait for one yr :

I = $520

cash inflow :$385 for 3 yrs.

so Principle Value cost = 520 - 385/(1.08)3= $214

Now that they turn out to be approximately same and hence it would be better to wait for an year to receive more cash inflow.

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