Chrustuba Inc. is evaluating a new project that would cost $9 million at t = 0. There is a 50%...

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Chrustuba Inc. is evaluating a new project that would cost $9 million at t = 0. There is a 50% chance that the project would be highly successful and generate
 annual after-tax cash flows of $6 million during Years 1, 2, and 3. However, there is a 50% chance that it would be less successful and would generate only $1
 million for each of the 3 years. If the project is highly successful, it would open the door for another investment of $10 million at the end of Year 2, and this
 new investment could be sold for $20 million at the end of Year 3. Assuming a WACC of 8.75%, what is the project's expected NPV (in thousands) after taking this
 growth option into account?

Robert · Accepted Answer

Chrustuba Inc. is evaluating a new project that would cost $9 million at t = 0. There is a 50% chance that 
the project would be highly successful and generate annual after-tax cash flows of $6 million during 
Years 1, 2, and 3. However, there is a 50% chance that it would be less successful and would generate 
only $1 million for each of the 3 years. If the project is highly successful, it would open the door for 
another investment of $10 million at the end of Year 2,

Chrustuba Inc. is evaluating a new project that would cost $9 million at t = 0. There is a 50% chance that the project would be highly successful and generate annual after-tax cash flows of $6 million...

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