TASK
A project has a present value (PV) of $100 million today and will be worth either $140 million or $80 million next year. Assume that the simple annual risk-free rate is 5%, and the project costs $105 million today.
- Should you do the project based on the NPV analysis? 2. If the project can be doubled with a cost of $100 million next year, should you do the project? 3. If the project can be downsized by 50% next year with a saving of $50 million (from perhaps selling some equipment and reducing the workforce), should you do the project?
- What is the value of the project if you have both the expansion and contraction options?
