b What is the estimated NPV of the proposed investment without considering

# B what is the estimated npv of the proposed

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b. What is the estimated NPV of the proposed investment, without considering investment-delay option? Invesment Outlay, t = 0 Investment Outlay, t = 1 1. Define the term "real option." Provide an example of each of the four common

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if the revealed consumer demand was "high" or "medium." Show calculations to why no investment would be made if the revealed level of demand were "lo outflows (cell I20:I22), and weighted net present value (cells J20:J22). What is the interpretation of the expected NPV of the project (i.e., positive \$12.95 milli Solution 4. We see from Panel B of Exhibit 12.10 that XYZ would invest in the project on 5. In Panel B of Exhibit 12.10 , show for each of the three scenarios the calculat for present value (at t = 0) of cash inflows (cells H20:H22), present value of ca 1. “Real Options” are options embedded in capital investment projects. These o management to dynamically adjust to new information and as such are analogo primary differences between financial options and real options: (1) the latter inv (tangible and/or intangible property) while the former relate to financial assets; organized exchange, while the latter are not. There are, in general, two types of real options: those that provide managerial growth options. As noted in the excerpt regarding the CMA exam, these two ge subdivided into the following categories: A. Expansion Options (i.e., the opportunity to make follow-on investments of th B. Abandonment Options (i.e., the ability to “bail out” of an investment project in losses) C. Delay Options (i.e., the ability to defer an investment, to capitalize on new in over time, such as the anticipated level of market demand; these options are a options) D. Scale-Back Options (i.e., the ability, through production methods or varying investment in a project) 2. The following two terms are associated with financial options: A. “Put Option” provides the holder with the ability, but not the requiremen of stock) at a specified price (called the “exercise price” or “strike price”) o “exercise date” B. “Call Option” provides the holder with the ability, but not the requiremen share of stock) at a specified price (called the “exercise price” or “strike pr called the “exercise date”
3. a \$100 NPV of Outcome (Demand) p Year 1 Year 2 Year 3 Outcome High 0.25 \$70.00 \$70.00 \$70.00 \$59.83 Medium 0.50 \$50.00 \$50.00 \$50.00 \$14.16 Low 0.25 \$5.00 \$5.00 \$5.00 (\$88.58) 1.00 \$43.75 \$43.75 \$43.75 3. b Calculation 1 Expected NPV of Project = (\$108,901) (i.e., cell G90*1,000,000) Calculation 2 Expected NPV of Project = (\$108,901) ('=(NPV(C25,C90:E90)-C84) 4. Why would the investment not be made if the revealed level of demand were "low"? As seen from the above, the NPV of the project if demand were "low" for each of the three ye not invest if the expected level of demand were "low." WACC = 0.15 Risk-Free Rate = 0.05 Cash Flows Scenario p Year 1 Year 2 Year 3 Year 4 High 0.25 (\$100.00) \$70.00 \$70.00 \$70.00 Medium 0.50 (\$100.00) \$50.00 \$50.00 \$50.00 Low 0.25 \$0.00 \$0.00 \$0.00 \$0.00 1.00 Required Investment Outlay, t = 0 would be negative. In Exhibit 12.10 , Panel B, this negative amount would be discounted bac t = 1 to t = 0. As such, at t = 1 (when the level of consumer demand is revealed), the compan 5. Calculations for Panel B, text Exhibit 12.10 : Interpretation: If the company delays the decision to invest (i.e., to time period 1 versus tim

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