Decision Tree Analysis Shows a Project to Have Several Possible

question 19

Multiple Choice

Decision tree analysis shows a project to have several possible outcomes the best of which has an NPV of $12M calculated over a five-year life. This best case path has an overall probability of occurring of 20%. A real option is available at an initial cost of $800,000 which will add a single $6M cash inflow to this best case path at its end. The option doesn't have a significant effect on the project's risk. What is the option's value? The company's cost of capital is 12%.

• A)($3,404)
• B)$2,604,000
• C)($119,000)
• D)$274,000

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