Initial investment is $1,500. NPC has the opportunity to invest in a project tha
ID: 2754426 • Letter: I
Question
Initial investment is $1,500. NPC has the opportunity to invest in a project that has a 75% chance of generating $500 per year for 7-years under good conditions or a 25% chance of generating $25 per year for 7-years. Assuming that all cash flows are discounted at 10%, if NPC chooses to wait a year before proceeding, how much will this increase or decrease the project's expected NPV in today's dollars (i.e., at t = 0), relative to the NPV if it proceeds today?
$77.23
$85.81
$95.34
$105.94
$116.53
Please show work!
Explanation / Answer
Below is the solution. The answer is not in the list
Initial Investment 1500 75% 25% Annual Inflow 500 25 Expected Annual 381.25 Discounting Factor when starting now Discounting Factor when starting after a year Y1 0.91 Y2 0.83 Y2 0.83 Y3 0.75 Y3 0.75 Y4 0.68 Y4 0.68 Y5 0.62 Y5 0.62 Y6 0.56 Y6 0.56 Y7 0.51 Y7 0.51 4.87 Y8 0.47 4.43 Expected Inflow if started now 1,856.08 Expected Inflow if started after 1 year 1,687.35 Diff 168.73