- Garner-Wagner is considering investing in a project that
requires an investment of $3,000,000. The project will generate a
cash inflow of 500,000 per year for the next 5 years. The cost of
capital is 10%. What is the project's net present value?
- If Garner-Wagner goes ahead with this project today, it will
obtain knowledge that will give rise to additional opportunities 5
years from now (at t = 5). The company can decide at t = 5 whether
or not it wants to pursue these additional opportunities. Based on
the best information available today, there is a 35% probability
that the outlook will be favorable, in which case the future
investment opportunity will have a positive net present value of $6
million at t = 5. There is a 65% probability that the outlook will
be unfavorable, in which case the future investment opportunity
will have a negative net present value of -$6 million at t = 5.
Garner-Wagner does not have to decide today whether it wants to
pursue the additional opportunity. Instead, it can wait to see what
the outlook is. However, the company cannot pursue the future
opportunity unless it makes the $3 million investment today. What
is the estimated net present value of the project, after
consideration of the potential future opportunity?
Please include calculations and formulas suing Excel to better
understand the solution set.