Consider an investment opportunity with an option to grow that requires a $4 million investment today. In one year, you will find out whether the project is successful. The probability of being successful in year 1 is 20% and in this case the project generates $1.2 million in revenue per year in perpetuity; otherwise, the project will generate nothing. You have the option to grow --- at the end of year 2, you can double the size of the project on the original terms. The appropriate cost of capital is 12%. 

Calculate the following two:

I. The NPV of the investment opportunity WITHOUT the option to grow.

II. The value of the option to grow.

Answer rating: 100% (QA)

I To calculate the NPV of the investment opportunity without the option to grow we need to find the expected cash flows and discount them to the prese... View the full answer