Jo’s Machining is considering investing in a project with either a fixed or flexible technology. The company already knows that the project would make sense using the fixed technology, but managers are wondering if the flexible technology might be superior. The flexible technology would require a higher investment outlay. If the flexible technology is chosen, however, it could save $5.1 million of input costs 3 years from now if relative prices change. Management estimates the probability of relative prices changing to be 70%. Jo’s discount rate is 5%. Given that the flexible technology costs $1.3 million more, what is the NPV of this flexibility option (in thousand dollars)?
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