Wilson's Antiques Is Considering a Project That Has an Initial

question 47

Multiple Choice

Wilson's Antiques is considering a project that has an initial cost today of $14,000.The project has a life of 2 years with cash inflows of $9,500 a year.Should Wilson's decide to wait 2 years to commence this project,the initial cost will increase by 3 percent and the cash inflows will increase to $11,000 a year.What is the value of the option to wait if the applicable discount rate is 12 percent?

• A)$1,269.26
• B)$1,335.54
• C)$2,115.08
• D)$1,606.76
• E)$1,935.54

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Definitions:

Company-specific Risk

The risk associated with an individual company, including factors like management competence, product demand, and industry competition.

Correlation

The tendency of two variables to move together.

Two-asset Portfolio

It is a financial portfolio comprising two different assets, aimed at diversifying investment risk.

Securities

Financial instruments that represent an ownership position in a publicly-traded corporation (stock), a creditor relationship with a governmental body or a corporation (bond), or rights to ownership as represented by an option.