A company is considering to take a 2 year project with $20 million initial cost. If the demand is high, the project will generate cash flow of $15 million each year. If the demand is average, the project will generate cash flow of $13 million each year. If the demand is low, the project will generate cash flow of $8 million each year. The cost of capital for the project is 10%. The probability of high demand, average demand, and low demand are 20%, 60% and 20% respectively. After 2 years, customer tastes will change and the first generation product will be terminated. The company will be able to launch a second-generation product if demand for the original product is average or above. This second-generation product should have the same expected cash flow and risk level as first generation products. What is the project value with growth option using decision tree analysis? The risk free rate=5%.
Question 2 options:
8.99 million
7.15 million
7.90 million
8.37 million