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MACHINE REPLACEMENT Year 0 1 2 CF of single machine -550 100 200 Discount rate for machine cash flows 25% <-- This is the risk-adju NPV of single machine -24.56 Number of machines bought next year 9 Option value of single machine purchased half a year from now 45.43 ### NPV of total project 384.30 ### Black-Scholes Option Pricing Formula S 525.44 PV of machine CFs X 550.00 Exercise price = Machi r 10.00% Risk-free rate of intere T 0.5 Time to maturity of opt Sigma 30% <-- Volatility 0.1264 <-- (LN(S/X)+(r+0.5*sig -0.0857 0.5503 0.4658 Option value = BS call price 45.43 d 1 d 2 <-- d 1 - sigma*SQRT(T N(d 1 ) <--- Uses formula Norm N(d 2 ) <--- Uses formula Norm <-- S*N(d 1 )-X*exp(-r*T) A B C D 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22
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3 4 300 400 usted discount rate. #MACRO? ine cost st tion (in years) igma^2)*T)/(sigma*SQRT(T)) ) mSDist(d 1 ) mSDist(d 2 ) )*N(d 2 ) E F G 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22
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Cost 50,000 Present value of future cash flows 45,000
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This note was uploaded on 01/23/2011 for the course FGB 780 taught by Professor Edwardchang during the Spring '09 term at Missouri State University-Springfield.

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