2. Growth options Companies often come across projects that have positive NPV opportunities in which the company does no

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2. Growth options
Companies often come across projects that have positive NPV
opportunities in which the company does not invest. Companies must
evaluate the value of the option to invest in a new project that
would potentially contribute to the growth of the firm. These
options are referred to as growth options.
Consider the case of Weghorst Co.:
Weghorst Co. is considering a three-year project that will
require an initial investment of $55,000. It has estimated that the
annual cash flows for the project under good conditions will be
$60,000 and $10,000 under bad conditions. The firm believes that
there is a 60% chance of good conditions and a 40% chance of bad
conditions.
If the firm is using a weighted average cost of capital of 13%,
the expected net present value (NPV) of the project
is________ . (Note: Round your answer to the nearest
whole dollar.)
Choices:
39446
21695
27612
29585
Weghorst Co. wants to take a potential growth option into
account when calculating the project’s expected NPV. If conditions
are good, the firm will be able to invest $5,000 in year 2 to
generate an additional cash flow of $18,000 in year 3. If
conditions are bad, the firm will not make any further investments
in the project.
Using the information from the preceding problem, the expected
NPV of this project—when taking the growth option into
account—is$________ . (Note: Round your answer to the
nearest whole dollar.)
51269
44582
40124
49040
Weghorst Co.’s growth option is worth________. (Note: Round your
answer to the nearest whole dollar.)
6163
4879
5136
4109
5393