hard · Principles of Finance capital-budgeting
A firm is considering a 10M investment today. There is a 60% chance of high demand (8M annual CF for 4 years) and a 40% chance of low demand (2M annual CF for 4 years).
If high demand occurs, the firm can spend another 15M at the start of Year 2 to expand, adding 6M in annual CF. Using a 10% discount rate, what is the value of this expansion option?
- 2.20M
- 1.32M
- 4.02M
- 0.00M
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