Session 12R - COMM308 AA Fall 2012

# The dry scrub device costs 200 to set up and 30 to

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Unformatted text preview: to set up and \$30 to operate. It lasts for 5 years and has no salvage value. Assuming that pollution control equipment is replaced as it wears out, which method do you recommend if the cost of capital is 10%? Assume the tax rate is zero. a)Dry scrub, the EANPV is -\$11.00 b)Wet scrub, the EANPV is -\$90.21 c)Dry scrub, the EANPV is -\$82.76 d)Wet scrub, the EANPV is -\$9.79 e)Dry scrub, the EANPV is -\$124.34 Equivalent Annual NPV (EANPV) approach compares projects by Project NPV finding the NPV of the individual projects and then determining the amount of EANPV = an annuity that is economically equivalent to the NPV generated by each 1 1 project over its respective time horizon. 1− k (1 + k ) n Wet scrub costs: 100\$ at time 0 + 3 year annuity of 50\$ PV(at time 0) = -224.34 Dry scrub costs: 200\$ at time 0 + 5 year annuity of 30\$ PV(at time 0) = -313.72 EANPV (Wet Scrubs)=-90.21 EANPV (Dry Scrubs)=-82.76 Payoff at expiration Payoff: Buying Call Option Payoff = max{ ST − K ,0} No loss when ST < K !!! K ST – K Price increased ST > K Holder gains ST (Stock price at time T) ST − K if ST ≥ K Payoff = if ST < K 0 Payoff at expiration Payoff from Writing Call Option − ( S1 − \$60) if S1 ≥ \$60 Payoff = 0 if S1 < \$60 \$60 \$80 S1 (Stock price in 1 year) –\$20 Payoff = − max{ S1 − \$60,0} – (S1 – \$60) Payoff from Buying Put Option (Cont’d) Payoff at expiration K – ST K ST < K Holder gains K Payoff = max{ K − ST ,0} ST (Stock price at time T) Payoff at expiration Payoff from Writing Put Option (Cont’d) Payoff = − max{ K − ST ,0} K ST (Stock price at time T) ST < K writer loses –K – (K – ST) Q3, Summer I 2011: (5 Points) Important: when drawing payoff or profit diagrams, you need to show the location of each important point on the diagram by writing down...
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## This note was uploaded on 07/01/2013 for the course COMM Comm 308 taught by Professor Kavehmoradi during the Fall '12 term at Concordia University Irvine.

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