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    Calculating the value of option to wait

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    Wilson's Antiques is considering a project that has an initial cost today of $10,000. The project has a two-year life with cash inflows of $6,500 a year. Should Wilson's decide to wait one year to commence this project, the initial cost will increase by 5% and the cash inflows will increase to $7,500 a year. What is the value of the option to wait if the applicable discount rate is 10%?

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    Solution Preview

    Option 1: Start now
    Initial outlay=Co=-$10000
    Cash inflow in year 1=C1=$6500
    Cash inflow in year 2=C2=$6500
    Discount rate=r=10%
    NPV of ...

    Solution Summary

    Solution depicts the steps to calculate the value of option to wait.

    $2.19