Course Hero Logo

Ch26 Tropical Sweets Real Options Mini Case - 4/11/2010...

Course Hero uses AI to attempt to automatically extract content from documents to surface to you and others so you can study better, e.g., in search results, to enrich docs, and more. This preview shows page 1 - 3 out of 21 pages.

4/11/2010Chapter 25.Real OptionsDemandProb.Assume that you have just been hired as a financial analyst by Tropical Sweets Inc., a mid-sized Californiacompany that specializes in creating exotic candies from tropical fruits such as mangoes, papayas, and dates.Thefirm's CEO, George Yamaguchi, recently returned from an industry corporate executive conference in SanFrancisco, and one of the sessions he attended was on real options.Since no one at Tropical Sweets is familiarwith the basics of real options, Yamaguchi has asked you to prepare a brief report that the firm's executives coulduse to gain at least a cursory understanding of the topics.a.
High0.3$45$13.50Average0.4$30$12.00Low0.3$15$4.50Expected CF=$30.00Procedure 1: DCF OnlyYear123Expected CF$30.00$30.00$30.00NPV=$4.61e.Use decision tree analysis to calculate the NPV of the project with the investment timing option.d.Now suppose this project has an investment timing option, since it can be delayed for a year.The cost will stillbe $70 million at the end of the year, and the cash flows for the scenarios will still last three years.However,Tropical Sweets will know the level of demand, and will implement the project only if it adds value to thecompany.Perform a qualitative assessment of the investment timing option’s value.Answer: See Chapter 25Mini Case Show
Procedure 3: Decision Tree Analysisa. Scenario Analysis: Proceed with Project TodayCostFuture Cash FlowsNPV thisProb.Data forYear 0Prob.123Scenariox NPVStd Deviation$45$45$45$41.91$12.5741730%-$7040%$30$30$30$4.61$1.84030%$15$15$15-$32.70-$9.81417Expected NPV of Future CFs =$4.61835Standard Deviation=$28.89Coefficient of Variation =6.27b. Decision Tree Analysis: Implement in One Year Only if OptimalCostFuture Cash FlowsNPV thisProb.Data forYear 0Prob.1234x NPVStd Deviation-$70$45$45$45$35.70$10.7117730%$040%-$70$30$30$30$1.79$0.713730%$0$0$0$0$0.00$0.0039

Upload your study docs or become a

Course Hero member to access this document

Upload your study docs or become a

Course Hero member to access this document

End of preview. Want to read all 21 pages?

Upload your study docs or become a

Course Hero member to access this document

Term
Spring
Professor
Murtagh
Tags
Net Present Value, Probability theory, future cash flows, Rrf

Newly uploaded documents

Show More

Newly uploaded documents

Show More

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture