# NPV of Projects, Expansion Option

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.

https://brainmass.com/business/annuity/npv-projects-expansion-option-117925

#### 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.