e to time period 1 versus tim proposed project at t 0 is expected to be 1295

E to time period 1 versus tim proposed project at t 0

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If the company delays the decision to invest (i.e., to time period 1 versus tim proposed project, at t = 0, is expected to be $12.95 million. called the “exercise date” Expansion Options and Delay Options on Real Assets are conceptually sim assets; Abandonment Options and Scale-Back Options are conceptually simila assets.
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and the associated es ? of ? g the n types of real options.
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as ow." s ion)? nly tion ash options provide an opportunity for ous to financial options. There are two volve investments in real assets and (2) the former are traded on an flexibility, and those that provide eneral types of options can be further he original investment goes well) n the hope of minimizing expected nformation that might be revealed also referred to as “wait and see” output, to reduce, but not eliminate, nt, to sell a given security (e.g., share on or before a given date, called the nt, to buy a financial asset (e.g., rice”) on or before a specified date,
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Weighted NPV $14.96 $7.08 ($22.15) ($0.11) )*1000000) ears PV of PV of Weighted Outflows Inflows ($95.2381) $138.9789 $10.935 ($95.2381) $99.2707 $2.016 $0.00 $0.00 $0.000 Expected NPV = $12.951 ck from ny would @ t = 0 @ t = 0 NPV (@ t =0) me period 0), the NPV of the milar to “call options” on financial ar to “put options” on financial
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Problem 12-51: Real Options and Sensitivity Analysis Background managers are now interested in knowing how sensitive this decision made regarding the basic analysis. Therefore, they've asked you to Data Revised probabilities (expected level of consumer demand): high = 20% 30% medium = 50% 40% low = 30% 30% Sensitivity analysis--estimates of discount rates: risk-free interest rate = 4% WACC = 13% Requirements 1. Holding everything else constant, what is the impact on the expec of the decision if the probabilities for the three scenarios change a high (20%), medium (50%), and low (30%). Does the decision cha based on these revised assumptions? Why or why not? (Show ca 2. Holding everything else constant, what is the impact on the expec of the decision if the probabilities for the three scenarios change a high (30%), medium (40%), and low (30%). Does the decision cha based on these revised assumptions? Why or why not? (Show ca 3. Prepare a 5 x 3 table containing the estimated NPV of the decisio for each of the following: risk-free rate of interest (4%, 5%, 6%) an average cost of capital (13%, 14%, 15%, 16%, 17%). For example in your table will be the estimated NPV of the project if the risk-fre interest is 4% and the WACC is 13%. What does your analysis su Solution Including Investment-Delay ("wait-and-see") Option: $100 After-Tax Cash Inflows p Year 2 Year 3 Refer to the XYZ Company example in the chapter. Based on the res 12.10 , management of the company decided to delay the implement regarding Panel B of Exhibit 12.10 . Investment Outlay, t = 1
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High Demand 0.25 $70 $70 Medium Demand 0.50 $50 $50 Low Demand 0.25 $5 $5 WACC = 0.15 Risk-free interest rate = 0.05 Sensitivity Analysis: Demand Probabilities ORIGINAL ASSUMPTION: WACC = 0.15 Risk-Free Rate = 0.05 Cash Flows Scenario p Year 1 Year 2 Year 3 High 0.25 $ (100.00) $ 70.00 $ 70.00 Medium 0.50 $ (100.00) $ 50.00 $ 50.00 Low 0.25 $ - $ - $ - Demand Probabilities: 20%, 50%, 30% WACC = 0.15 Risk-Free Rate = 0.05 Cash Flows Scenario p Year 1 Year 2 Year 3 High 0.20 ($100.00) $70.00 $70.00 Medium 0.50 ($100.00) $50.00 $50.00 Low 0.30 $0.00 $0.00 $0.00 Demand Probabilities: 30%, 40%, 30% WACC = 0.15 Risk-Free Rate = 0.05
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