Valuation of a Project Investment

Question

“When you have the option of deciding when to invest, it is usually optimal to invest when the NPV is substantially greater than zero.”

Your Company Plc is considering a new project at a cost of £13 million. The project may begin today or in exactly one year. You expect the project to generate £2,000,000 in free cash flow the first year if you begin the project today. Free cash flow is expected to grow at a rate of 3% per year. The risk-free rate is 4%. The appropriate cost of capital for this investment is 11%. The standard deviation of the project’s value is 30%.

Applying suitable model discuss whether you should begin the project today or wait one year?

Summary

The question belongs to financial management and it discusses about calculating NPV, IRR, Payback period, etc for a company.

Total Word Count 77