Many investment opportunities, if successful, lead to other investment opportunities. The production
capacity of a successful product line can later be expanded to satisfy increased demand, or distribution
can be extended to new geographic markets. These opportunities are growth options, which add value
to a project.
Growth Option Example
Kidco is now considering a project that will cost $30 million. Management believes there is a 25% chance that
the project will “take off” and generate operating cash flows of $34 million in each of the next 2 years, after
which preteen tastes will change and the project will be terminated. There is a 50% chance of average demand,
