solution

Petroxy Oil Co. could spend $510,000 to build the facility. Spending the additional $10,000 on the facility will allow the company to switch the products they produce in the facility after the first year of operations if demand turns out to be weak in year 1. If the company switches product lines because of low demand, it will be able to generate cash flows of $245,000 in years 2 and 3 of the project.

What is the expected NPV of this project if Petroxy Oil Co. decides to invest the additional $10,000 to give themselves a flexibility option? (Note: Do not round your intermediate calculations.)

$78,572

$70,715

$31,429

$21,288

What will be the value of Petroxy Oil Co.’s flexibility option?

$31,429

$78,572

$21,288

$70,715

$19,159