A company is considering delaying a project with after-tax cash flows of $25 mil

Question

A company is considering delaying a project with after-tax cash flows of $25 million but that costs $300 million to take on (the life of the project is 20 years, and the cost of capital is 16%). A simulation of the cash flows leads you to conclude that the standard deviation in the present value of cash inflows is 20%. If you can acquire the rights to the project for the next 10 years, what is the value of the rights? (The six-month T-bill rate is 8%, the 10-year bond rate is 12%, and the 20-year bond rate is 14%.)

Explanation / Answer

Initial ourflow of the project    300.000 Million Present value of $25 million *discount factor for 20 years at 16%=25*5.928841    148.221 Million Standard Deviation =20% 20% Variance=(20%)^2 4.0% t (option life) 10 years r (match the life option) 12% y(dividend yield)=1/t=1/10 10%

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