Question: Consider an option to wait 1 year to accept a project. Initial cost $70 million, Cost of Capital 15%, risk-free rate 3%, cash flows occur

Consider an option to wait 1 year to accept a project. Initial cost $70 million, Cost of Capital 15%, risk-free rate 3%, cash flows occur for 3 years.

Demand

Probability

Annual cash flow

High

25%

$60

Average

50%

$40

Low

25%

$20

Using DCF Analysis, what is the expected NPV of the project?

Answer = 21.33. How?

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