Nebraska Pharmaceuticals Company (NPC) Is Considering a Project That Has

Multiple Choice

Nebraska Pharmaceuticals Company (NPC) is considering a project that has an up-front cost at t = 0 of $1,500.(All dollars in this problem are in thousands.) The project's subsequent cash flows are critically dependent on whether a competitor's product is approved by Health Canada.If Health Canada rejects the competitive product,NPC's product will have high sales and cash flows,but if the competitive product is approved,that will negatively impact NPC.There is a 75% chance that the competitive product will be rejected,in which case NPC's expected cash flows will be $500 at the end of each of the next seven years (t = 1 to 7) .There is a 25% chance that the competitor's product will be approved,in which case the expected cash flows will be only $25 at the end of each of the next seven years (t = 1 to 7) .NPC will know for certain 1 year from today whether the competitor's product has been approved.​NPC is considering whether to make the investment today or to wait a year to find out Health Canada's decision.If it waits a year,the project's up-front cost at t = 1 will remain at $1,500; the subsequent cash flows will remain at $500 per year if the competitor's product is rejected and $25 per year if the alternative product is approved.However,if NPC decides to wait,the subsequent cash flows will be received only for six years (t = 2 … 7) .​Assuming that all cash flows are discounted at 10%,calculate the effect on the proposed project's risk,by waiting to undertake the project.By how much will delaying reduce the project's coefficient of variation?

A) 2.23
B) 2.46
C) 2.70
D) 2.97