A project has a present value (PV) of $100 million today and will be worth either $140 million or $80 million next year. Assume that the simple annual risk-free rate is 5%, and the project costs $105 million today.
Should you do the project based on the NPV analysis?
2. If the project can be doubled with a cost of $100 million next year, should you do the project?
3. If the project can be downsized by 50% next year with a saving of $50 million (from perhaps selling some equipment and reducing the workforce), should you do the project?
What is the value of the project if you have both the expansion and contraction options?