Jenny Rene, the CFP of Asor Products, Inc. has just completed an evaluation of a proposed capital expenditure for equipment that would expand the firm ' s manufacturing capacity. Using the traditional NPV methodology, she found the project unacceptable because NPV traditional =- $ 1,700 < $ 0 Before recommending rejection of the proposed project, she has decided to assess whether there might be real options embedded in the firm ' s cash flows. Her evaluation uncovered three options:
Option 1; Abandonment; The project could be abandoned at the end of 3 years, resulting in an addition to NPV of $ 1,200.
Option 2; Expansion; If the project outcomes occurred, an opportunity to expand the firm ' s product offerings further would become available at the end of 4 years. Exercise of this option is estimated to add $ 3,000 to the projects NPV.
Option 3: Delay; Certain phases of the proposed project could be delayed if market and competitive conditions caused the firm ' s forecast revenues to develop more slowly than planned. Such a delay in implementation at that point has a NPV of $ 10,000.
Jenny estimated that there was a 25 % chance that the abandonment option would need to be exercised, a 30 % chance that the expansion option would be exercises, and only a 10 % chance that the implementation of certain phases of the project would have to be delayed.
a) use the information provided to calculate the strategic NPV, NPV strategic, for Asor Products ' proposed equipment expenditure.
b) judging on the basis of the findings in part a, what action should jenny recommend to management with regard to the proposed equipment expenditure?