Cost of initial investment, Electrical Engineering

Based upon the following inputs, propose the optimal course of action for this venture:

  • Probability of success: 30%; probability of failure: 30%; base case probability: 40%
  • Cost of initial investment is $20mm
  • Success NPV: $70mm; Base case NPV: $25mm
  • Two upfront options:
    • Staged investment of $10mm/stage; no impact on probabilities or scenario NPV but allows abandonment after first stage investment in case of anticipated failure
    • Deferral of investment by 1 year to pursue $3mm feasibility study; decreases odds of failure by 10% and shifts odds evenly to success and base case
  • Two midpoint options (assumes either success or base case scenario):
    • Operate venture indefinitely and realize full NPV
    • Reinvest for new market expansion under the same terms as the upfront option with the following changes:

Chance of success is lowered by 5% and chance of failure is increased by 5%

Upfront cost is higher by $5mm but PV of future cash flows remains unchanged

Posted Date: 4/2/2013 2:48:23 AM | Location : United States

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