Reconsider General Designs diamond film project from Table 8.6(b).Suppose that General Design now believes it also has
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a. What are the cash flows for the stage 2 investment? What is the present value of the cash flows for the stage 2 investment if it succeeds? If it fails? What is the present value of the initial cost of the stage 2 investment?
b. If General Design were to evaluate the stage 2 decision today (before learning whether stage 1 is successful), what is its NPV?
c. Assuming General Design waits to learn whether stage 1 is successful:
i. What is the NPV today of the stage 2 investment?
ii. What is total project NPV, incorporating the option to grow?
iii. What is the value of the option to grow?
Discount Rate
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal...
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