What is the minimum new cash flow

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Reference no: EM132001589

A project under consideration will produce cash flows of $630,000 per year for 13 years. The project will cost $3.8 million today to begin production. In one year, it is possible that the project will be a runaway success. If this is true, the company can spend $1.8 million at that time to expand production. After expansion, the annual cash flows would be $1.35 million per year. There is a 30 percent likelihood of a runaway success. In either case, the project will still end 13 years from today. What is the value of the option to expand assuming a required return of 12 percent? What is the minimum new cash flow that the company would require to undertake the expansion?

Reference no: EM132001589

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