ch12 - CHAPTER12 OtherTopicsinCapitalBudgeting

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    12-1 CHAPTER 12 Other Topics in Capital Budgeting Evaluating projects with unequal lives Identifying embedded options Valuing real options in projects
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    12-2 Evaluating projects with  unequal lives Projects S and L are mutually exclusive, and will  be repeated.  If k = 10%, which is better?         Expected Net CFs Year  Project S  Project L   0 ($100,000) ($100,000)   1        59,000        33,500   2        59,000        33,500   3        -        33,500   4        -        33,500
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    12-3 Solving for NPV,  with no repetition Enter CFs into calculator CFLO register for  both projects, and enter I/YR = 10%. NPV S  = $2,397 NPV L  = $6,190 Is Project L better? Need replacement chain analysis.
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    12-4 -100,000 59,000 59,000 59,000 59,000 -100,000 -41,000 Replacement chain Use the replacement chain to calculate an  extended NPV S  to a common life. Since Project S has a 2-year life and L has a  4-year life, the common life is 4 years. 0 1 2 3 10% 4 NPV S = $4,377 (on extended basis)
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    12-5 What is real option analysis? Real options exist when managers can  influence the size and riskiness of a  project’s cash flows by taking different  actions during the project’s life. Real option analysis incorporates  typical NPV budgeting analysis with an  analysis for opportunities resulting from  managers’ decisions.
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    12-6 What are some examples of  real options? Investment timing options Abandonment/shutdown options Growth/expansion options Flexibility options
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    12-7 Illustrating an investment  timing option If we proceed with Project L, its annual cash 
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This note was uploaded on 09/05/2011 for the course FIN 4405 taught by Professor Cowan during the Spring '11 term at Fairleigh Dickinson.

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ch12 - CHAPTER12 OtherTopicsinCapitalBudgeting

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