13-1 a. Project A requires $9 million initial capital outlay at T=0, with WACC = 11%, and cash flows as shown below in millions. There is 50% chance that the Project A will generate $6 million each year for 3 years, and 50% chance to generate $1 million each year for 3 years, what is the expected NPV for the Project A, and will the Project be accepted?

0 1 2 3

50% Prob. | | |

6 6 6

-9

| | |

50% Prob. 1 1 1

b. If the project is hugely successful, $10 million will be spent at the end of Year 2, and the new venture will be sold for $20 million at the end of Year 3, as shown below, what is the expected NPV for the Project A, and will the Project A be accepted?

0 1 2 3

50% Prob. | | |

6 6 6

-10 +20

-9 -4 26

| | |

50% Prob. 1 1 1

c. What is the value of growth option (the difference between NPV with growth option and without option, using 0 if the NPV is negative)?