Cheung Kong limited is deciding whether to proceed with project A. The cost would be a $10 million in year 0. There is a 55% chance that A would be hugely successful and would generate annual after-tax cash flows of $6 million per year during Years 1,2, and 3. However, there is a 45% chance that A would be less successful and would generate only $1 million per year for the 3 years. If project A is hugely successful, it would open the door to another investment, Project B, which would require an outlay of $9 million at the end of year 2. Project B would then be sold to another company at a price of $20 million at the end of year 3. Cheung Kong's WACC is 12%.
A.If the company does not consider real options, what is Project A's NPV?
b.What is project A's NPV considering the growth option?
c. How Valuable is the growth option?