Sagot :
The project's value before the timing option is ₦3,268 (in thousands), while the project's value after the timing option is ₦8,954 (in thousands).
How do we calculate the value of a project?
1. The value (in thousands) of the project before considering the investment timing option can be calculated as follows:
Using the formula for calculating the present value of an ordinary annuity, the present values of cash flows can be calculated as follows:
PV = P * ((1 - (1 / (1 + r))^n) / r) …………………………………. (1)
Where;
PV = Present value cash flows
P = Annual cash flows
r = WACC = 10.0%, or 0.10
n = number of years = 5
Substitute the values into equation (1), we have:
PV when the market is good = ₦5,000 * ((1 - (1 / (1 + 0.10))^5) / 0.10) = ₦18,954
PV when the market is bad = ₦2,000 * ((1 - (1 / (1 + 0.10))^5) / 0.10) = ₦7,582
Project's value before timing option = (Probability the market will be good * (₦18,954 - ₦10,000)) + (Probability the market will be bad * (₦7,582 - ₦10,000)) = (50% * (₦18,954 - ₦10,000)) + (50% * ((₦7,582 - ₦10,000)) = ₦3,268 (in thousands)
2. The value (in thousands) of the project after considering the investment timing option can be calculated as follows:
Since timing is considered, it means the firm will only invest in the project if the market is strong and the annual cash flow will be ₦5 million without any probability.
Therefore, we have:
Project's value after timing option = ₦18,954 - ₦10,000 = ₦8,954 (in thousands)
3. In addition, the value of option wait can be calculated as follows:
Value of option wait = Project's value after timing option - Project's value before timing option = ₦8,954 - ₦3,268 = ₦5,686 (in thousands)
Learn more about the value of option wait here: https://brainly.com/question/18125375.
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