Pearson is considering the development of a new online platform. The initial cost of the project...

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Pearson is considering the development of a new online platform. The initial cost of the project is $39 million, including programming, testing and content development. The company has a weighted average cost of capital of 12%. There is a 30% probability that demand will be strong, 40% that it will be normal and 30% that it will be weak. The expected cash flows for each case are given below. After 6 years, cash flows are expected to decrease at a constant rate forever. 78 1 2 3 Demand 4 5 6 Cash flows ($M) 9 10 11 12 13 345 14 15 A WACC 16 Probability Year 0 1 2 3 4 5 6 B 0.12 Growth rate after year 6 Strong Normal Weak 0.3 0.4 0.3 17 16 Strong Normal Weak -39 -39 10 3 14 5 16 6 17 6 3 1 -5% D -39 7 10 11 11 10 6 -10% -25% Now assume that the company can study the market for the new platform. The market study takes a year, costs $1.5 million and will reveal if demand will be strong, normal or weak. If the company accepts the project after one year, the cash flows will be the same, just shifted back by one year (forever growth/decline starts after year 7). What is the NPV of the project with the option to delay (in $ million)? 1+ decimals Submit Pearson is considering the development of a new online platform. The initial cost of the project is $39 million, including programming, testing and content development. The company has a weighted average cost of capital of 12%. There is a 30% probability that demand will be strong, 40% that it will be normal and 30% that it will be weak. The expected cash flows for each case are given below. After 6 years, cash flows are expected to decrease at a constant rate forever. 78 1 2 3 Demand 4 5 6 Cash flows ($M) 9 10 11 12 13 345 14 15 A WACC 16 Probability Year 0 1 2 3 4 5 6 B 0.12 Growth rate after year 6 Strong Normal Weak 0.3 0.4 0.3 17 16 Strong Normal Weak -39 -39 10 3 14 5 16 6 17 6 3 1 -5% D -39 7 10 11 11 10 6 -10% -25% Now assume that the company can study the market for the new platform. The market study takes a year, costs $1.5 million and will reveal if demand will be strong, normal or weak. If the company accepts the project after one year, the cash flows will be the same, just shifted back by one year (forever growth/decline starts after year 7). What is the NPV of the project with the option to delay (in $ million)? 1+ decimals Submit

Answer rating: 100% (QA)

To calculate the NPV of the project with the option to delay we need to consider the cash flows and the timing of the investment Heres how we can appr... View the full answer