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Unformatted text preview: FNCE 3010 (Durham). HW 19 real options 1. ABC Sporting Goods is examining a project to produce a new line of tennis rackets. The project is expected to sell 7000 units per year with a net cash flow of $60 per unit. The project will run for 10 years, the discount rate is 16%, and an initial investment of $2.1 million is required. The project has no salvage value at the end of 10 years. Ignore taxes. (a) What is the base case NPV? (b) Now, suppose that at the end of the first year, the project can be disman- tled and sold for $1.4 million. At what level of sales would it make sense to abandon the project? (c) Suppose that sales turn out to be either 5000 units or 9000 units per year, each with probability 50%. The true scenario is discovered at the end of the first year. Taking the option to abandon into account, what is the projects NPV? (d) What is the value of the option to abandon?...
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