Consider the following investment proposal: At t-0, initial outlay of $190m Probability=.7 that cash flow of...

 

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Consider the following investment proposal: At t-0, initial outlay of $190m Probability=.7 that cash flow of $50m per annum for t=1 through 10; Probability=.3 that cash flow of $20m per annum for t=1 through 10. The applicable discount rate = 10% per annum. Would you undertake the project? The double-up option: at t=1, you may double up the operation by incurring another outlay of $190 which will generate a cash flow for t-2 through 10. What is the NPV of the project with the option? Consider the following investment proposal: At t-0, initial outlay of $190m Probability=.7 that cash flow of $50m per annum for t=1 through 10; Probability=.3 that cash flow of $20m per annum for t=1 through 10. The applicable discount rate = 10% per annum. Would you undertake the project? The double-up option: at t=1, you may double up the operation by incurring another outlay of $190 which will generate a cash flow for t-2 through 10. What is the NPV of the project with the option?

Answer rating: 100% (QA)

To determine whether to undertake the project we need to calculate the Net Present Value NPV of the ... View the full answer