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##### RMK is considering to invest in a project for a new product either immediately

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**Question**

RMK is considering to invest in a project for a new product either immediately or one year later. If RMK invests in the project today, there will be 75% chance of good market acceptance of the product and 25% chance of bad market acceptance of the product. If the market reaction to the new product is good, a cash inflow of $500 million will be realized each year for the next 7 years. If market reaction to the new product is bad, a cash inflow of $25 million will be realized each year for the next 7 years.;However, if RMK chooses to wait for one year to obtain more information about market tastes, the company would know definitely about the market reaction and would only invest in the project if the outlook is good. The initial cost of the project is $1,500 million, and the project must end 7 years from now either RMK invests now or after one year.;a. (10 points) Assuming that both the cost and all expected cash flows are discounted at 10%, if RMK chooses to wait one year before proceeding, how much will this increase or decrease the project's expected NPV in today's dollars (i.e., at t = 0), relative to the NPV if it proceeds today? Show the timelines.;b. (10 points) Calculate the effect of waiting on the project's risk, using the same data. By how much will delaying reduce or increase the project's coefficient of variation? (Hint: Use the expected NPV for each case.);Additional Requirements;Level of Detail: Show all work

Paper#28325 | Written in 18-Jul-2015

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