Question

You are considering a project which has been assigned a discount rate of 7 percent. If you start the project today, you will incur an initial cost of $3,300 and will receive cash inflows of $2,100 a year for 2 years. If you wait one year to start the project, the initial cost will rise to $3,520 and the cash flows will increase to $2,457 a year for 2 years. What is the value of the option to wait?

Answer 1

The value of the option is $922.30

Step-by-step explanation:

To find the value of the option to wait, calculate the net present value.

The net present value is the present value of after tax cash flows from an investment less the amount invested.

NPV can be calculated using a financial calculator:

Cash flow in year 0 = $-3,520

cash flow a year for 2 years = $2,457

I = 7%

NPV = $922.30

To find the NPV using a financial calacutor:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. After inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.

3. Press compute

I hope my answer helps you