However if npc decides to wait the subsequent cash

This preview shows page 5 - 7 out of 12 pages.

However, if NPC decides to wait, the subsequent cash flows will be received only for six years (t = 2 ... 7).Assuming that all cash flows are discounted at 10%, if NPC chooses to wait a year before proceeding, how much will this increase or decrease the project’s expected NPV in today’s dollars (i.e., at t = 0), relative to the NPV if it proceeds today?a. $77.23b. $85.81c. $95.34d. $105.94e. $116.53(14.3) Timing option, effect of delay on CVAnswer: a Diff: M
15.In the previous problem you found the benefit from delaying an investment decision. Now use the same data to calculate the effect of waiting on the project's risk. By how much will delaying reduce the project's coefficient of variation? (Hint: Use the expected NPV as found in Problem 14.)
Page 4Chapter 14: Real Options
Multi-part:(The following data apply to Problems 16 and 17. The problems MUSTbe kept together.)Diplomat.com is considering a project that has an up-front cost of $3 million and is expected to produce a cash flow of $500,000 at the end of each of the next 5 years. The project’s cost of capital is 10%.(14.3) Project NPV--nonalgorithmic
16.Based on the above data, what is the project’s net present value?
Diff: M17.If Diplomat goes ahead with this project today, it will obtain knowledge that will give rise to additional opportunities 5 years from now (at t = 5). The company can decide at t = 5 whether or not it wants to pursue these additional opportunities. Based on the best information available today, there is a 35% probability that the outlook will be favorable, in which case the future investment opportunity will have a net present value of $6 million at t = 5. There is a 65% probability that the outlook will be unfavorable, in which case the future investment opportunity will have a net present value of -$6 million at t = 5. Diplomat.com does not have to decide today whether it wants to pursue the additional opportunity. Instead, it can wait to see what the outlook is. However, the company cannot pursue the future opportunity unless it makes the $3 million investment today. What is the estimated net present value of the project, after consideration of the potential future opportunity?a. -$1,104,607b. -$875,203c. $199,328d. $561,947e. $898,205
(The following data apply to Problems 18 and 19. The problems MUSTbe kept together.)Oklahoma Instruments (OI) is considering a project called F-200 that has an up-front cost of $250,000. The project’s subsequent cash flows are critically dependent on whether another of its products, F-100, becomes an industry standard. There is a 50% chance that the F-100 will become the industry standard, in which case the F-200’s expected cash flows will be $110,000 at the end of each of the next 5 years. There is a 50% chance that the F-100 will not become the industry standard, in which case the F-200’s expected cash flows will be $25,000 at the end of each of the next 5 years.

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture