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Real options problem 3 round 3 values

# Real options problem 3 round 3 values - Discount rate...

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Discount rate 15% Growth rate 3% Expansion option Company has right but not obligation to buy round 2 assets for \$405 in year 3 Round 1 Year 0 1 2 3 After-tax cash flow 15.0 20.0 25.0 Investment -225.0 214.6 Net cash flow -225.0 15.0 20.0 239.6 PV of cashflows \$185.70 NPV (39.3) NPV [round 1 assets + call (round 2)] Round 2 0 1 2 3 4 5 6 Year 30.0 40.0 50.0 After-tax cash flow -405.0 Investment 429.2 Net cash flow (405.0) 30.0 40.0 479.2 PV of cashflows 244.20 371.39 NPV (33.61) Exercise price 405.00 Investment at year 3 Time to expiration 3 Underlying asset value 244.20 PV of cash flows at t=0 from the project or stock price in Black Scholes Risk free rate 0.05 Sigma 0.45 Value of call using Black Scholes at time 0 Stock = 244.20 d1 = -0.07 (LN(B7/B8)+(B11+(B9^2)/2)*B10)/(B9*SQRT(B10)) Strike = 405.00 N(d1) = 0.4733 normsdist(E7) Sigma = 0.45 Time = 3 d2 = -0.8463484 G7-B9*SQRT(B10) Rate = 0.05 N(d2) = 0.1987 normsdist(E10) C = 46.33 B7*E8-B8*exp(-B11*B10)*E11 NPV round 1 assets + call (round 2) = (39.3) + 46.33 = 7.02 Round 3 Assume it is necessary to invest in round 2 to get to round 3; take calculations as of the beginning of round 2 NPV(round 1 assets + call round 2 assets + call round 3 assets) 3 4 5 6 7 8 9 Year 60.0 80.0 100.0 After-tax cash flow -770.0 Investment 858.3 Net cash flow (770.0)
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