Answer:
Step-by-step explanation:
NPV of first option = - 2 + 1 / 1.1 + 1 / 1.1² + 1 / 1.1³ + 1 / 1.1⁴ + 1 / 1.1⁵
= -2 + .909 + .826+ .751+.683+ .620 = $1.789
NPV of the second option :--
NPV when annual cash flow is 1.5 million
-2 / 1.1 + 1.5 /1.1² + 1.5/1.1³ + 1.5 / 1.1⁴ + 1.5 / 1.1⁵ + 1.5 / 1.1⁶
= -1.818 + 1.239 + 1.127+1.024+.931+.846
= -1.818 + 5.167
= 3.349
NPV when annual cash flow is 0.5 million
-2 / 1.1 + .5 /1.1² + .5/1.1³ + .5 / 1.1⁴ + .5 / 1.1⁵ + .5 / 1.1⁶
= - 1.818 + 1.722 = $ -0 .096
NPV = .65 x 3.349 - .35 x .096
= 2.177 - .0336
= $2.1434
value of option wait = $2.1434 - $1.789
= $ 0.3544