Answer-first summary for fast verification
Answer: $0.20 million.
The correct answer is **A** because the NPV of the project, including the real option, is calculated as follows: - **Project NPV (DCF alone)**: -$0.20 million - **Cost of the option**: $0.40 million (subtracted) - **Value of the option**: $0.80 million (added) **Calculation**: Project NPV = -$0.20 million - $0.40 million + $0.80 million = **$0.20 million**. **Option B** is incorrect because it does not account for the original negative NPV of the project. **Option C** is incorrect because it adds the cost of the option instead of subtracting it.
Author: LeetQuiz Editorial Team
Ultimate access to all questions.
A new project has a net present value (NPV) of -$0.20 million. An additional investment of $0.40 million would provide the flexibility to switch to a lower-cost input in the future. If the estimated value of this option is $0.80 million, the total value of the project, including the option, is:
A
$0.20 million.
B
$0.40 million.
C
$1.00 million.
No comments yet.