Charles Underwood Agency Inc. is looking at investing in a production facility that will require an initial
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Question:
Charles Underwood Agency Inc. is looking at investing in a production facility that will require an initial investment of $ The facility will have a threeyear useful life, and it will not have any salvage value at the end of the projects life. If demand is strong, the facility will be able to generate annual cash flows of $ but if demand turns out to be weak, the facility will generate annual cash flows of only $ Charles Underwood Agency Inc. thinks that there is a chance that demand will be strong and a chance that demand will be weak.
If the company uses a project cost of capital of what will be the expected net present value NPV of this project?
$
$
$
$
Charles Underwood Agency Inc. could spend $ to build the facility. Spending the additional $ on the facility will allow the company to switch the products they produce in the facility after the first year of operations if demand turns out to be weak in year If the company switches product lines because of low demand, it will be able to generate cash flows of $ in years and of the project.
What is the expected NPV of this project if Charles Underwood Agency Inc. decides to invest the additional $ to give themselves a flexibility option? Note: Do not round your intermediate calculations.
$
$
$
$
What will be the value of Charles Underwood Agency Inc.s flexibility option?
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