orie_451_homework_10_spring_2008

orie_451_homework_10_spring_2008 - ORIE 451/551 Homework#10...

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ORIE 451/551 Homework #10 Due Friday, April 18, 2007 1. There are two projects, Project Aquinas and Project Balzac. Both will run for two years. Aquinas has an initial free cash flow of $10 million. It has an up move of e 0.35 , a down move of the reciprocal of that, and an upward probability of 50%. The risk-free rate is 5%, and the WACC is 12%. Balzac has an initial free cash flow of $10 million. It has an up move of e 0.15 , and a down move of the reciprocal of that. The upward probability is 50%. A project runs for two periods and then is sold at fair price (i.e., no gain or loss). Balzac has never been run, so the WACC is not known. It costs $2 million to switch from Aquinas to Balzac. It costs $1 million to switch from Balzac to Aquinas. Find the optimum switching strategy and the present value of the project with optimal switching. 2. Technology Capote and Technology Dumas are both available. Capote has the following cash flows in table form:
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orie_451_homework_10_spring_2008 - ORIE 451/551 Homework#10...

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