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The American Satellite Energy Corporation (ASEC) has identified an aggressive new energy project wherein the firm would place a network of solar panel satellites into earth orbit for an initial investment of $1.2 billion and beam electric energy to the surface through microwave technology. With 50% probability, this project will generate perpetual CFATs of $750 million per year with the first cash flow arriving 5 years after initial investment (t=5). With 50% probability, the project would not be competitive due to the discovery of offshore oil reserves, and would generate perpetual CFATs of $0 per year. (Therefore, ASEC expects a deferred perpetuity of $750 million or $0 with equal chance.) The WACC appropriate for this project is 20%.

a) Calculate the DCFNPV for this investment.

b) Now suppose that ASEC will learn soon after investing whether the above project will fail (generate $0 CFATs in perpetuity) or not. However, ASEC recognizes that if the above project fails, it could retool the solar panel network for negligible cost (free) and sell power to an expanded international space station to generate expected perpetual CFATS of $600 million per year with the first cash flow arriving in year 10 (t=10). What is the value of this alternative use option at t=0? (Note that this alternative use is only available if ASEC retools the solar panel network such that it cannot both beam energy to the planet surface and supply energy to the International Space Station. That is, beaming electric energy to the planet surface and powering the International space station are mutually exclusive.)

c) What is the NPV (inclusive of the option) of this project if the flexibility of the alternative use (option) to power the International space station requires an additional initial $10 million investment (at t=0) to make this alternative use a future possibilitythat is, the option has a cost?

NOTE: Previous Chegg solution to this question is totally incorrect.

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