What is the value of the option to delay one period

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Reference no: EM13266846

Consider the following 4 period project, with the following expected cashflows.

Time Period 0 1 2 3 4

Initial Investment 400 N/A N/A N/A N/A

Gross Revenue 0 250 250 250 250

COGS 0 100 100 100 100

Depreciation(straight-line) N/A ? ? ? ?

Pre-tax earnings N/A ? ? ? ?

Taxes (30%) N/A ? ? ? ?

After-tax earnings N/A ? ? ? ?

Cashflows N/A ? ? ? ?

a) Fill in the blanks(?).

b) Estimate IRR and NPV

c) Assume the cost of capital is 8%, and that revenues and costs are binomially distributed - either they will all be 50% above the expected in the table, or they will all be 50% below that expected in the table. These two possibilities are equally like. If you wait, the true outcome will be appraent in period 1, at the expense of a one period delay for all cash-flows. What is the value of the option to delay one period?

Reference no: EM13266846

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