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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 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

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