ch5_Options_examples2 - RealOptions...

Info icon This preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
The following information pertains to questions 1-3. You are considering a project that costs $1050. If the product is a success (probability of success = 0.5), cash flows will be $200 per year in perpetuity. If it is a failure, the cash flows will be $0 per year in perpetuity. Assume a discount rate of 10%. Round all answers to the nearest dollar. 1. What is the expected NPV of the project? a. -$850 b. $50 c. -$50 d. -$950 e. $950 2. At the end of the first year, you will learn more about the economic viability of the project. If the project is a failure, the firm will sell off its assets for a scrap value of $500. What is the NPV of the project given the additional information? 3. What is the value to the company of the abandonment option? The following information pertains to questions 4-5. Diplomat.com is considering a project that has an up-front cost of $3 million and produces an expected cash flow of $500,000 at the end of each of the next five years. The project’s cost of capital is 10 percent.
Image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern