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

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

Correct Answer:

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