Norris Production Company (NPC)NPC Is Considering Whether to Make the Investment

question 31

Multiple Choice

Norris Production Company (NPC) NPC is considering whether to make the investment today or to wait a year to find out about the FDA's decision. If it waits a year, the project's up-front cost at t = 1 will remain at $2,500, the subsequent cash flows will remain at $750 per year if the competitor's product is rejected and $50 per year if the alternative product is approved. However, if NPC decides to wait, the subsequent cash flows will be received only for six years (t = 2 ... 7) This is a risky project, so a WACC of 16.0% is to be used. If NPC chooses to wait a year before proceeding, what is the value of the timing option today?

• A) $124.22
• B) $138.02
• C) $153.36
• D) $170.40
• E) $187.44

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