fm13 15 - will be -$32.70 million. However, if we wait one...

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Mini Case: 13 - 15 d. Now suppose this project has an investment timing option, since it can be delayed for a year. The cost will still be $70 million at the end of the year, and the cash flows for the scenarios will still last three years. However, Tropical Sweets will know the level of demand, and will implement the project only if it adds value to the company. Perform a qualitative assessment of the investment timing option’s value. Answer: If we immediately proceed with the project, its expected NPV is $4.61 million. However, the project is very risky. If demand is high, NPV will be $41.91 million. If demand is average, NPV will be $4.61 million. If demand is low, NPV
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Unformatted text preview: will be -$32.70 million. However, if we wait one year, we will find out additional information regarding demand. If demand is low, we wont implement project. If we wait, the up-front cost and cash flows will stay the same, except they will be shifted ahead by a year. The value of any real option increases if the underlying project is very risky or if there is a long time before you must exercise the option. This project is risky and has one year before we must decide, so the option to wait is probably valuable....
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This note was uploaded on 07/13/2011 for the course FIN 4414 taught by Professor Staff during the Spring '08 term at University of Florida.

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