Solution:- Initial Investment=$41000 (Outflow)
Project Tenure=3 years
Cost of Capital=14%
If demand is strong,
Year 1 Cashflow= $28500 (Inflow)
Year 2 Cashflow= $28500 (Inflow)
Year 3 Cashflow= $28500 (Inflow)
If demand is weak,
Year 1 Cashflow= $1000 (Inflow)
Year 2 Cashflow= $1000 (Inflow)
Year 3 Cashflow= $1000 (Inflow)
(1) Given:-There is a 50% chance of strong market demand and 50% chance of weak market demand
Therefore, Expected NPV is calculated as,
............................(STRONG DEMAND).....................................(WEAK DEMAND)
..........................................(Answer)
(2) If demand is strong, and project is delayed by 1 year,
Then Expected NPV is given by,
Hence the answer is this only as the closes option given is $5202.
2. Investment timing options Companies often need to choose between making an investment now or waiting till the company can gather more relevant information about the potential project. This opportu...
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