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Takamura Motors is evaluating a new piece of equipment that will automatically install power windows in cars coming off the production line. The equipment cost is $3.5 million, and the firm estimates that the present value of the annual cost savings from installing the equipment is $2.8 million. The production manager is also considering purchasing a module that will allow the equipment to be used for Takamura’s SUV production. The additional module represents a real option with a cost of $1.1 million dollars. The production manager estimates that adding the module would give Takamura cost savings of an additional $2.0 million.
What is the profitability of the project before and after considering the real option?
A.
B.
C.
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