Considering production of a new cell phone

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Reference no: EM13806000

Samsung Electronics is considering production of a new cell phone. The project will require an investment of $20 million and generate $8 million per year over the next 3 years. If the phone is well-received (good condition), the project will produce cash flows of $9 million a year for 3 years; but if the market does not like the product (bad condition), the cash flows will be only $5 million per year. There is a 50% probability of both good and bad market conditions. Samsung can delay the project two years while it conducts a test to determine whether demand will be strong or weak. The delay will not affect the project’s required investment or its cash flows. Samsung’s WACC is 6%.

a) What kind of real option does Samsung consider?

b) What action do you recommend? Take it immediately or wait? Show all your work.

Reference no: EM13806000

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