Explore BrainMass

# NPV of Projects, Expansion Option

This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

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.

#### Solution Preview

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.

Note: For the following answers the abbreviations have the following meanings

PVIF= Present Value Interest Factor
PVIFA= Present Value Interest Factor for an Annuity
They can be read from tables or calculated using the following equations
PVIFA( n, ...

#### Solution Summary

The expert calculates the net present value of the initial project, net present value of the expansion option. The cost of capitals are determined.

\$2.19