Question

Lindley Corp. is considering a new product that would require an investment of $10 million now, at t = 0. If the new product is well received, then the project would produce after-tax cash flows of $6.9 million at the end of each of the next 3 years (t = 1, 2, 3), but if the market did not like the product, then the cash flows would be only $2.2 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 would be the same whether the project is delayed or not. The project's WACC is 11%. What is the value (in thousands) of the project after considering the investment timing option? Do not round intermediate calculations.

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Answer 1

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

ANSWER : 1971.92 THOUSANDS OR = 1972 THOUSANDS

C w ENG 04:17 09-11-2020 X EU85 EP EQ ER ES ET EU EV EW EX EY EZ FA 64 65 4.55 66 67 NOTE 68 EXPECTED CASH FLOW PER YEAR = 0.50 X 6.9 + 0.50 X 2.2 = NPV OF PROJECT IF STARTED TODAY NPV = PV OF ALL CASH FLOW - INVESTMENT NPV = 4.55 X PVIFA @11%, 3 YEARS - 10 NPV = 4.55 X 2.443715 - 10 NPV = 1.1189 PVIFA @11%, 3 YEARS (1/r)*(1-(1/(1+r)^n)) 2.443715 69 70 71 72 73 74 NOTE 75 76 NPV OF PROJECT IF STARTED AFTER A YEAR NPV = PV OF ALL CASH FLOW - INVESTMENT NPV = [(6.9 X PVIFA @11%, 3 YEARS) - 10 ] X 0.5 X PVIF @11%, 1 YEAR NPV = [((6.9*2.443715)-10)*0.5]*0.900901 NPV = 3.0908 PVIF @11%, 1 YEARS 1/(1+r)^n 0.900901 77 78 79 80 VALUE OF OPTION TO DELAY = 1.9719 [3.0908-1.1189] 81 82 83 ANSWER VALUE OF OPTION TO DELAY = 1971.92 (IN THOUSANDS] 84 85 86 87 EAC MACRS RELEVANT MARGINAL KEN MI-np-ir BETA LEVERED Sheet1 NPV CCA REPLACEMENT BOND OPTION TO WAIT OCF 1 +