CNCC Moda Di Milano Postpones a Major Investment Questions

User Generated

fcbbegul

Engineering

Colorado Northwestern Community College

Description

Please answer the following questions in detail, provide examples whenever applicable, provide in-text citations.

  1. Please describe the real option inherent in each of the following cases and provide some real-life hypothetical cases. Also, explain in each case if the option seller is involved and who that seller might be.

a. Moda di Milano postpones a major investment. The expansion has positive NPV on a discounted cash-flow basis, but top management wants to get a better fix on product demand before proceeding.

b. Western Telecom commits to production of digital switching equipment specially designed for the European market. The project has a negative NPV, but it is justified on strategic grounds by the need for a strong market position in the rapidly growing, and potentially very profitable, market.

c. Western Telecom vetoes a fully integrated, automated production line for the new digital switches. It relies on standard, less-expensive equipment. The automated production line is more efficient overall, according to a discounted cash-flow calculation.

d. Mount Fuji Airways buys a jumbo jet with special equipment that allows the plane to be switched quickly from freight to passenger use or vice versa.

2. State if each of the following statements is true or false. Justify your answer.

  1. Decision trees can help identify and describe real options.
  2. The option to expand increases PV.
  3. High abandonment value decreases PV.
  4. If a project has a positive NPV, the firm should always invest immediately.

3. State if each of the following statements are true or false. Justify your answer.

  1. A firm that earns the opportunity cost of capital is earning economic rents.
  2. A firm that invests in positive NPV ventures expects to earn economic rents.
  3. Financial managers should try to identify areas where their firms can earn economic rents, because they think that positive NPV projects are likely to be found in projects that earn economic rent.
  4. Economic rent is the equivalent annual cost of operating capital equipment.

Explanation & Answer:
3 Questions Sets
User generated content is uploaded by users for the purposes of learning and should be used following Studypool's honor code & terms of service.

Explanation & Answer

Attached.

ANSWERING QUESTIONS

1

Answering questions

Student’s name
Institutional affiliation

ANSWERING QUESTIONS

2
Answering Questions

Question 1, Describing Real Option in Provided Cases
a.

Moda di Milano postpones a significant investment. The expansion has positive NPV on
a discounted cash-flow basis, but top management wants to better fix product demand
before proceeding.
The real option to this the timing option. This option allows an organization to postpone a

capital budgeting project instead of implementing or rejecting it immediately (Loncar et al., 2017).
An example of a timing option is the decision on when to harvest crops. In this real option, the
seller is involved. The seller is the top management.
b. Western Telecom commits to the production of digital switching equipment specially
designed for the European market. The project has a negative NPV, but it is justified on
strategic grounds by the need for a strong market position in the rapidly growing, and
potentially very profitable, market.
The real option for this case is the expansion option. This option allows firms or
organizations to expand its action in the future at a petite or no cost...


Anonymous
Great content here. Definitely a returning customer.

Studypool
4.7
Trustpilot
4.5
Sitejabber
4.4

Related Tags