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A project has a net present value of $4.51 million. The company could wait 2 years,...

A project has a net present value of $4.51 million. The company could wait 2 years, at which time the project will have a net present value of $5.63. The company’s discount rate is 5%. What is the value of the option to wait 2 years?

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Answer #1

Net present value at current time = $ 4.51 million

Net present value after 2 years = $ 5.63 million

Discount Rate = 5 %

In order to find the Net Present Value of option of waiting, we need to bring it to the current time by discounting by discount rate. Hence,

Net Present Value of Option = $ 5.63 / ( 1 + 0.05)2 = $ 5.11 million

Value of option to wait 2 years = Net Present Value of Option - Net Present Value at current time

= $ 5.11 - $ 4.51 million

= $ 0.6 million

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