Wilson's Antiques is considering a project with an initial cost today of $10,000.The project has a life of 2 years with cash inflows of $6,500 a year.Should the firm decide to wait one year to commence this project,the initial cost will increase by 5 percent,and the cash inflows will increase to $7,500 a year.What is the value of the option to wait at a discount rate of 10 percent?
A)$1,006.76
B)$1,235.54
C)$1,509.28
D)$1,606.76
E)$1,735.54

Question

Quizplus · Accepted Answer

The value of the option to wait is calculated by comparing the net present value (NPV) of starting the project now versus starting it in one year. The NPV of starting now is $1,900.83, and the NPV of starting in one year is $2,907.59. The difference, which is the value of the option to wait, is $1,006.76.

Wilson's Antiques Is Considering a Project with an Initial Cost