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13. Suppose we can postpone investment three years and, with the new improved technology, the project will have similar risk but for an investment of $5 million will generate perpetual cash flows (beginning
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7 votes
13. Suppose we can postpone investment three years and, with the new improved technology, the project will have similar risk but for an investment of $5 million will generate perpetual cash flows (beginning exactly one year after the investment) of $500,000. Would you recommend that we invest in the original project or wait three years to invest in the new project

User Errnesto
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1 Answer

9 votes
9 votes

Answer:

Invest in the original project.

Step-by-step explanation:

It is better for the company to invest in the current project rather than waiting for three year. The project after three years will require initial investment of $5 million and will provide returns of $500,000. These cash flows needs to be discounted at a discount factor to determine the present value of the cash flow. The value of money three years later will be lower than the current value.

User Mateusz Korwel
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