Lect21- Real Options

Lect21- Real Options - ISE460:Engineering Economy...

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ISE 460: Engineering  Economy “Real Options Introduction” University of Southern California Fall 2010 Joseph Chow Week 13: Lecture 21
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HW Schedule Summary 12/01/10 2 HW #7, due  11/19/10 Lecture 16 7.1 7.2 Lecture 18 7.3 Lecture 19 7.4 HW #8, due 12/3/10 Lecture 20 8.1 8.2 Lecture 21 8.3 8.4
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Class Schedule Countdown Tues, 11/23 – Case Study Presentations 1 Thurs, 11/25 – No Class (Happy  Thanksgiving!) Tues, 11/30 – Case Study Presentations 2 Thurs, 12/2 – Final Exam Review Thurs, 12/9 – Final Exam, 4:30-6:30,  Location TBD (I’ll give details by 12/2/10) 12/01/10 3
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Review Prior Deterministic methods of economic analysis Sensitivity analysis, breakeven analysis Random variables and simulation This Week Decision Tree Analysis for Sequential Project  Evaluation Real Options (I’ve scanned in Chapter 13) 12/01/10 4
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Ex. 12.11 Bill’s Investment  Problem in a Decision-Tree  Format Bill has $50,000 to invest in financial market  for 1 year Option A: Buy 1000 shares of a tech stock at  $50/share, broker fee of $100 for  buying/selling, and high return (+$25,000)  with 25% chance, medium return (+$4,500)  with 40% chance, and low return (-$15,000)  with 35% chance Option B: Buy $50,000 U.S. Treasury bond  with 7.5% annual rate (+$3,750) (no tax),  with $150 transaction fees 20% long term capital gains tax, MARR = 5% 12/01/10 5
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Ex. 12.11 Setting Up the Tree 12/01/10 6
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REAL OPTIONS ANALYSIS We are  NOT  covering section 13.3 on Option Pricing methodologies –  I’m just covering simple conceptual understanding of real options 12/01/10 7
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Shipping Lines Sailing  Uncertain Seas “… container ships during boom times  ordered fleets of new vessels for as much as  $50 million apiece that are getting delivered  only now – just as business dries up.   Analysts say companies likely will try to  cancel their orders, sell the ships, or even  convert them to tankers or cruise vessels.” - “ Shipping Lines Sail Uncertain Seas ” –  by J.W. Miller,  The Wall Street Journal , Oct  8, 2008 12/01/10 8
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Shippers have been making costly  investments that are difficult to reverse  (salvage without some loss) High degree of uncertainty over time THE KEY POINT: This high degree of  uncertainty is incrementally REVEALED to  them over time and they can ADAPT their  decisions accordingly! 12/01/10
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This note was uploaded on 11/30/2010 for the course ISE 460 taught by Professor Bottlik during the Spring '06 term at USC.

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Lect21- Real Options - ISE460:Engineering Economy...

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