True concerning project with embedded options

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Reference no: EM131875688

XYZ Corporation has a 4-year project with a scale option that will postition it to increase cash flows by 1.4 times in the 3rd and 4th years of the project. The firm's cost of capital is 12%.

Cash flows without the scale option:

CF0 -2,000,000

CF1 700,000

CF2 600,000

CF3 600,000

CF4 500,000

1. What is the value of the scale option?

A. $5,782.10

B. $151,856.49

C. $297,929.88

D. Cannot be determined from the information provided

2. Which of the following statements is true concerning a project with embedded options?

Traditional NPV analysis may understate the value of a project that has embedded options.

Disregarding embedded options is fine provided that a project's NPV is positive.

Embedded options may change both the cash flows and risk associated with a project.

A. I only

B. I and II only

C. I and III only

D. I, II, and III

Reference no: EM131875688

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