Martin Development Co. is deciding whether to proceed with Project X. The cost would be $9 million in Year 0. There is a 50% chance that X would be hugely successful and would generate annual after-tax cash flows of $6 million per year during Years 1, 2, and 3. However, there is a 50% chance that X would be less successful and would generate only $1 million per year for the 3 years. If Project X is hugely successful, it would open the door to another investment, Project Y, which would require an outlay of $10 million at the end of Year 2. Project Y would then be sold to another company at a price of $20 million at the end of Year 3. Martin's WACC is 11%.

A. If the Company does not consider real options, what is Project X's NPV?<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

 

B. What is X's NPV considering the growth option?

 

 

C. How valuable is the growth option?

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Status NEW Posted 04 Aug 2017 12:08 PM My Price 6.00

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