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# Assume that the project, with the timing option, will have a cost of \$70 million at t=1, but that amount will be discounted at the risk free rate.

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1) a) Tropical Sweets is considering a project that will cost \$70 million and will generate expected cash flows of \$30 million per year for the next three years. The cost of capital for this type of project is 10 percent and the risk free rate is 6 percent. After discussions with the marketing department, you learn that there is a 30 percent chance of high demand, with future cash flows of \$45 million per year. There is a 40 percent chance of average demand, with cash flows of \$30 million per year. If demand is low (a 30 percent chance), cash flows will be only \$15 million per year. What is the expected NPV?

b) Use decision tree analysis to calculate the NPV of the project with an investment timing option that would allow the company to delay project implementation for 1 year. Assume that the project, with the timing option, will have a cost of \$70 million at t=1, but that amount will be discounted at the risk free rate.