ch5_Options_examples2 - RealOptions...

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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? a. $752 b. $300 c. $177 d. $200 e. $350 3. What is the value to the company of the abandonment option? a. $227 b. $127 c. $350 d. $250 e. $150 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 $500,000 at the end of each of the next five years. The project’s cost of capital is 10 percent. 4. Based on this information what is the project’s net present value? a. ($ 875,203) b. ($ 506,498) c. $ 54,307 d. ($1,104,607) e. $ 105,999 5. If Diplomat goes ahead with this project today, the project will create additional opportunities five years from now
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This note was uploaded on 10/03/2010 for the course FINANCE 08FB40447 taught by Professor Raymond during the Spring '10 term at University of Manchester.

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ch5_Options_examples2 - RealOptions...

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