Wilson's Antiques is considering a project that has an initial cost today of $10,000. The project has a two-year life with cash inflows of $6,500 a year. Should Wilson's 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 if the applicable discount rate is 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. Calculate the NPV for both scenarios and find the difference. The NPV of starting now is $1,900.83, and the NPV of starting in one year is $2,907.59. The value of the option to wait is $2,907.59 - $1,900.83 = $1,006.76.

Wilson's Antiques Is Considering a Project That Has an Initial