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INVESTMENT TIMING OPTION Digital Inc. is considering the production of a new cell phone. The project will require an investment of $15 million. If the phone is well received, the project will produce cash flows of $10 million a year for 3 years; but if the market does not like the product, the cash flows will be only $2 million per year. There is a 50% probability of both good and bad market conditions. Digital can delay the project a year while it conducts a test to determine whether demand will be strong or weak. The delay will not affect the dollar amounts involved for the projectʹs investment or its cash flows—only their timing. Because of the anticipated shifts in technology, the 1-year delay means that cash flows will continue only 2 years after the initial investment is made. Digital’s WACC is 10%. What action do you recommend?

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Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
Publisher: Cengage Learning
ISBN: 9781285867977
BuyFind

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
Publisher: Cengage Learning
ISBN: 9781285867977

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Chapter 13, Problem 3P
Textbook Problem

INVESTMENT TIMING OPTION Digital Inc. is considering the production of a new cell phone. The project will require an investment of $15 million. If the phone is well received, the project will produce cash flows of $10 million a year for 3 years; but if the market does not like the product, the cash flows will be only $2 million per year. There is a 50% probability of both good and bad market conditions. Digital can delay the project a year while it conducts a test to determine whether demand will be strong or weak. The delay will not affect the dollar amounts involved for the projectʹs investment or its cash flows—only their timing. Because of the anticipated shifts in technology, the 1-year delay means that cash flows will continue only 2 years after the initial investment is made. Digital’s WACC is 10%. What action do you recommend?

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