answers-odd-problems-ch12

answers-odd-problems-ch12 - Chapter 12 Real Options...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
Chapter 12 Real Options SOLUTIONS TO END-OF-CHAPTER PROBLEMS 12-1 a. 0 1 2 20 ├─────┼─────┼────── ────┤ -20 3 3 3 NPV = $1.074 million. b. Wait 1 year: PV @ 0 1 2 3 21 Yr. 1 Tax imposed | | | | | 50% Prob . 0 -20 2.2 2.2 2.2 15.45 Tax not imposed | | | | | 50% Prob. 0 -20 3.8 3.8 3.8 26.69 Tax imposed: NPV @ Yr. 1 = (-20 + 15.45)/(1.13) = -4.027 Tax not imposed: NPV @ Yr 1 = (-20 + 26.69)/ (1.13) = 5.920 Expected NPV = .5(-4.027) + .5(5.920) = 0.947 Note though, that if the tax is imposed, the NPV of the project is negative and therefore would not be undertaken. The value of this option of waiting one year is evaluated as 0.5($0) + (0.5)($ 5.920) = $2.96 million. Since the NPV of waiting one year is greater than going ahead and proceeding with the project today, it makes sense to wait. Mini Case: 12- 1 r= 13%
Background image of page 1

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

View Full DocumentRight Arrow Icon
12-3 a. 0 1 2 20 ├─────┼─────┼────── ────┤ -300
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 3

answers-odd-problems-ch12 - Chapter 12 Real Options...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online