Lecture_6_ - Lecture#6 Real Options and Capital budgeting...

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2-1 Lecture#6 Real Options and Capital budgeting Decision Trees
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2-2 Real Options One of the fundamental insights of modern finance theory is _____ Because corporations make decisions in a dynamic environment, ______
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2-3 Real Options The Option to Abandon The Option to Delay The Option to Expand
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2-4 Discounted CF and Options We can calculate the market value of a project as _____________________ A good example would be comparing the desirability of a specialized machine versus a more versatile machine. _________
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2-5 The Option to Abandon: Example Suppose we are drilling an oil well. The drilling rig costs $250 today, and in one year the well is either a success or a failure. Success means the value of oil in the well exceeds the expected production costs. The failure is when expected costs exceed oil value in the well. The outcomes are equally likely. The discount rate is 10%. The PV of the successful payoff at time one is $575.
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This note was uploaded on 07/04/2011 for the course FINA 463 taught by Professor Tsyplakov during the Fall '10 term at South Carolina.

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Lecture_6_ - Lecture#6 Real Options and Capital budgeting...

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