Question

13. Suppose we can postpone investment three years and, with the new improved technology, the project will have similar risk but for an investment of $5 million will generate perpetual cash flows (beginning exactly one year after the investment) of $500,000. Would you recommend that we invest in the original project or wait three years to invest in the new project

Answer 1

Answer:

Invest in the original project.

Explanation:

It is better for the company to invest in the current project rather than waiting for three year. The project after three years will require initial investment of $5 million and will provide returns of $500,000. These cash flows needs to be discounted at a discount factor to determine the present value of the cash flow. The value of money three years later will be lower than the current value.