Invest immediately:Squared dev.Prob.NPVNPVi – E(NPV)Squared deviationtimes probability0.75$934.21 $578$334,228$250,6710.25-$1,378.29-$1,734 $3,008,054$752,0131.00$356.08Variance$1,002,685Standard deviation$1,001.34CV2.81

Delay, then invest in period 1 if the outlook is good:Squared dev.Prob.NPVNPVi – E(NPV)Squared deviationtimes probability0.75$616.03 $154$23,718 $17,7890.25$0.00-$462$213,463$53,3661.00$462.02Variance$71,154Standard deviation$266.75CV0.58Reduction in the CV due to waiting 2.23Note that the problem implicitly assumes that the project is riskless if it is delayed. This is, of course, unrealis-tic. Note also that a lower cost of capital should be used to find the NPV of the Go Now decision than the Waitdecision. The appropriate cost of capital is often lowered by the existence of real options.16.(14.3) Project NPV--nonalgorithmicAnswer: b Diff: EFind the project’s NPV using a financial calculator and entering the following data inputs:CF0= -3,000,000; CF1-5= 500,000; I/YR = 10; and then solve for NPV = -$1,104,607.17.(14.3) Growth optionAnswer: c Diff: MStep 1:Find the NPV at t = 0 of the first project:Enter the following data inputs in the financial calculator:CF0= -3,000,000; CF1-5= 500,000; I/YR = 10; and then solve for NPV = -$1,104,607.Step 2:Find the NPV at t = 0 of the new projects:If at t = 5 the firm’s technology is not successful, the firm will choose not to do the additional projects(since their NPV is -$6,000,000). Therefore, the NPV at t = 5 is calculated as 0.35($6,000,000) + 0.65($0) = $2,100,000.However, this is the NPV at t = 5, so we need to discount this NPV to find the NPV of the additional projects today. Enter the following data inputs in the financial calculator:N = 5; I/YR = 10; PMT = 0; FV = 2,100,000; and then solve for PV = $1,303,935.Step 3:Find the NPV of the entire project considering its future opportunities:-$1,104,607 + $1,303,935 = $199,328.18.(14.3) Project NPV--nonalgorithmicAnswer: a Diff: EStep 1:Find the project’s expected cash flows in Years 1 through 5: (0.5)($110,000) + (0.5)($25,000) = $67,500.

Step 2:Find the project’s NPV by entering the following data inputs in the financial calculator:CF0= -250,000; CF1-5= 67,500; I/YR = 12; and then solve for NPV = -$6,678.19.(14.3) Abandonment option--nonalgorithmicAnswer: e Diff: MNo abandonment:Abandonment:

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- Fall '14
- Net Present Value, Options