Winters Corp

question 38

Multiple Choice

Winters Corp.is considering a new product that would require an investment of $20 million now,at t = 0.If the new product is well received,then the project would produce after-tax cash flows of $10 million at the end of each of the next 3 years (t = 1,2,3) ,but if the market did not like the product,then the cash flows would be only $4 million per year.There is a 50% probability that the market will be good.The firm could delay the project for a year while it conducts a test to determine if demand is likely to be strong or weak,but it would have to incur costs to obtain this timing option.The project's cost and expected annual cash flows would be the same whether the project is delayed or not.The project's WACC is 11.0%.What is the value (in thousands) of the option to delay the project? ​

• A)$1,311
• B)$1,457
• C)$1,619
• D)$1,799
• E)$1,999

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Definitions:

Ratification

The act of officially approving or confirming an action, agreement, or decision, often after the fact, to make it valid and binding.

Depreciation

The reduction in the value of an asset over time, particularly due to wear and tear.

Ratify

To formally approve or confirm an agreement or treaty, making it officially valid.

Misrepresentation of Age

The act of intentionally providing a false age or date of birth, usually for the purpose of obtaining certain rights or privileges not available to one's true age.