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NPV of Projects, Expansion Option

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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.

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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.

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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, ...

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