PROBLEM 13-5

First Project

Year 1

Year 2

Year 3

PV (good state)

150

15

15

15

prob = 50%

Investment

-100

prob = 50%

PV (bad state)

0

0

0

0

NPV

Follow-On Opportunity (Year 1)

Year 2

Year 3

Year 4

PV

1500

150

150

150

prob = 50%

Investment

-1000

prob = 50%

PV

900

90

90

90

NPV

Discount rate (cost of capital) can be found from the perpetuity formula