# HTG company's research scientists can begin an exciting new project at a cost of $10m now, after which there's a: 70% chance that cash flows will be $1m per year forever, starting in 5 years (t=5). This is the State A of the world. 20% chance that cash flows will be $3m per year forever, starting in 5

HTG company's research scientists can begin an exciting new project at a cost of $10m now, after which there's a:

• 70% chance that cash flows will be $1m per year forever, starting in 5 years (t=5). This is the State A of the world.

• 20% chance that cash flows will be $3m per year forever, starting in 5 years (t=5). This is the State B of the world.

• 10% chance of a major breakthrough in which case the cash flows will be $20m per year forever starting in 5 years (t=5), or the project can be expanded by investing another $10m (at t=5) which is expected to give cash flows of $60m per year forever, starting at year 9 (t=9). This is the C state of the world. The firm's cost of capital is 10% pa.

What's the present value (at t=0) of the option to expand in year 5?

**Related Book For**

## Fundamentals of Financial Management

15th edition

Authors: Eugene F. Brigham, Joel F. Houston

ISBN: 978-1337395250