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:

Oral Promise

A commitment made through spoken words which, in certain circumstances, can be legally binding, though harder to prove than written contracts.

Garnishment

A legal process by which a creditor can collect what a debtor owes by requiring a third party to turn over the debtor's property or wages.

Creditors

Individuals or entities to which money is owed.

Wages

Payments made to employees by employers in exchange for work performed, typically calculated on an hourly or piecework basis.