12 Part 4 Investing in Long-Term Assets: Capital Budgeting FIGURE 13.1 Analysis of a Growth Option (Dollars in Thousands) A B D E F G H 13 50% NPV@ 12% $603 -$358 $122 $480 3.93 4 5 Part 1. Project Without the Growth Option 6 Cash Flow at End of Period 7 Outcome Prob. 0 1 2 3 8 Good -$3,000 $1,500 $1,500 $1,500 19 Bad 50% -$3,000 $1,100 $1,100 $1,100 10 Expected NPV 11 Standard Deviation (a) 12 Coefficient of Variation = CV=0 / Expected NPV 13 14 Part II. Project With the Growth Option 15 Cash Flow at End of Period 16 0 1 2 3 17 Cash flows, initial investment _$3,000 $1,500 $1,500 $1,500 18 Cash flows, growth investment __$1,000 $5,000 19 Good 50% -$3,000 $1,500 $500 $6,500 20 Bad -$3,000 $1.100 $1,100 $1,100 21 Expected NPV 22 Standard Deviation (o) 23 Coefficient of Variation = CV = g / Expected NPV 24 25 Part III. Value of the Option 26 Expected NPV with the growth option 27 Expected NPV without the growth option NPV@ 12% 50% $3,364 -$358 $1,503 $1,861 1.24 $1.503 $122 $1,381 CASE 1: If the expected NPV without the growth option is positive, then 28 Value of the Option = Expected NPV with the Expected NPV without 29 growth option the growth option 30 31 CASE 2: If the expected NPV without the growth option is negative, then Value of the Option = Expected NPV with the 0 32 growth option 33 Note: If the expected NPV without the growth option is negative, the project would not be 34 undertaken, in which case the project would have no effect on firm value (NPV = 0). 35 36 VALUE OF OPTION= NA $1,381 considering an embedded real option to expand the project. GRE would invest $3 million at Time 0. Because this is considered a relatively risky investment, a WACC of 12% is used. There is a 50% probability of success, in which case the project will yield positive cash inflows of $1.5 million per year for 3 years. COMMODO 'All બાકી પણ હા, મજીદા નગારીનું કામ કરી ગયા મારા પગ દબાણ ગણ મન મારા કામમાં મારા મન માં ગાયા, DLL F /Fundamentals%20of%20Financial%20Management%20%2014e-%20Eugen Chapter 13 Real Options and Other Topics in Capital Budgeting 445 FIGURE 13.2 Analysis of an Abandonment Option (Dollars in Thousands) A B C D E F G H н 3 Part I. Cannot Abandon 4 5 Outcome Prob. 6 Best Case 2596 7 Base Case 50% 8 Worst Case 25% 9 10 11 12 $400 Cash Flow at End of Period 0 1 2 3 4 -$1,000 $400 $600 $800 $1300 -$1,000 $200 $500 $600 -$1,000 -$280 H$280 -$280 $280 Expected NPY Standard Deviation (o) Coefficient of Variation = CV=0 / Expected NPV NPV @ 10% $1,348 $298 |_$1,888 $14 $1,179 83.25 13 Part II. Can Abandon 14 15 Outcome Prob. 16 Best Case 25% 17 Base Case 50% 18 Worst #1 0% 19 Worst #2 25% 20 21 22 23 24 Part II. Value of the Option 25 Cash Flow at End of Period 0 1 2 3 4 -$1,000 $400 $600 $800 $1,300 _$1,000 $200 $400 $500 $600 _$1,000 $280 $280 -$280 -$280 _$1,000 -$280 $0 $0 Expected NPV Standard Deviation (a) Coefficient of Variation = CV=0 / Expected NPV NPV @ 10% $1,348 $298 -$1,888 Don't Use -$1,089 Use $214 $866 4.05 $200 26 Expected NPV with the abandonment option Expected NPV without the abandonment option $214 $14 $200 217 CASE 1: If the expected NPV without the abandonment option is positive, then Expected NPV with Expected NPV without Value of the Option= the abandonment the abandonment option 28 option 29 30 CASE 2: If the expected NPV without the abandonment option is negative, then Expected NPV with Value of the Option = the abandonment 0 31 option 32 Note: If the expected NPV without the abandonment option is negative, the project would not be undertaken in which case the project would have no effect on firm 33 value (NPV = 0). 134 135 VALUE OF OPTION NA ਦਾ $200 des G4.204 mars Tગામનગર આ વાતમાં જ મારી મધ્ય માણવામાલ સાગરમા ગરમ સરગામ ગામ માર માં ગામ ના ગાતા ગાતા ને DLL Ask a new question - Stud Cesar Rego Computers, A PDF Fundamen /Fundamentals%20of%20Financial%20Management%20%2014e-%20Eugene%20F% Chapter 13 Real Options and Other Topics in Capital Budgeting 447 FIGURE 13.3 Analysis of a Timing Option (Dollars in Thousands) H NPV@ 1296 $1,804 _$1,919 $58 $1,861 32.23 А B D E G |3|Part 1. Project Without the Timing Option 4 Cash Flow at End of Period 5 Outcome Prob. 0 1 2 6 Good 50% -$3,000 $2,000 $2,000 $2,000 17 Bad 50% -$3,000 $450 $450 $450 8 Expected NPV 9 Standard Deviation (0) 10 Coefficient of Variation = CV = 0 / Expected NPV 11 12 Part II. Delay the Decision Until We Know the Market Conditions 1113 Cash Flow at End of Period 14 Outcome Prob. 0 2 3 15 Good 50% SO --$3,000 $2,000 $2,000 16 Bad 50% $0 $0 $0 $0 17 Expected NPY 18 Standard Deviation (0) 19 Coefficient of Variation = CV = c/ Expected NPVT 20 21 Part 1. Value of the Option 22 Expected NPV with the timing option 23 Expected NPV without the timing option 24 25 CASE 1: If the expected NPV without the timing option is positive, then Value of the Option = Expected NPV with the Expected NPV without timing option the timing option 26 127 28 CASE 2: If the expected NPV without the timing option is negative, then Value of the Option = Expected NPV with the 29 timing option GO NPV 12% $339 $0 $170 $170 1.00 $170 $58 NA $170 Note: If the expected NPV without the timing option is negative, the project would not be undertaken, in which case the project would have no effect on firm value (NPV = 0). 31 32 33 VALUE OF OPTION = $170 134 Note: Under the Delay situation, we must find the NPV as of t = 0. If we set the cash flow for t= 0 at 50, then using a calculator or Excel, we automatically find the NPV at t = 0. However, if we let CFC-3000, CF = 2000, N = 2. and I/YR = 12, we get an NPV = 5380 under the Good outcome and an expected NPV of $190. Note, though, that these NPVs are as of t= 1, so we must discount them back 1 year at 12% to achieve comparability with the NPV calculated for not delaying the project and arrive 35 at the correct answer. Hab பேயாயபபாயா DLL e/Desktop/Fundamentals%20of%20Financial%20Management%20%2014e-%20E Chapter 13 Real Options and Other Topics in Capital Budgeting 449 FIGURE 13.4 Analysis of a Flexibility Option Dollars in Thousands) А B C D E F G H J 3 Part I. Project Without the Flexibility Option Cash Flow at End of Period 4 Outcome Prob. 0 1 2 3 5 Strong demand 6 Weak demand NPV@ 1296 $1,005 $1,397 50% $2,500 _$5,000 -$5,000 $2,500 $1,500 50% $2,500 $1,500 $1,500 Expected NPV -$196 Cash Flow at End of Period NPV@ 7 8 9 Part II. Project With the Flexibility Option 10 Outcome 11 Strong demand 12 Weak demand Switch products 13 14 Prob. 0 1 2 3 12% 50% -$5,100 -$5,100 $2.500 $1,500 50% $2,500 $2,500 $2,250 $2,250 Expected NPV $905 |_$366 $270 15 Part III. Value of the Option 16 $270 17 Expected NPV with the flexibility option Expected NPV without the flexibility option -$196 18 119 CASE 1: If the expected NPV without the flexibility option is positive, then Value of the Option = Expected NPV with the flexibility option 20 Expected NPV without the flexibility option NA 21 I 22 CASE 2: If the expected NPV without the flexibility option is negative, then Value of the Expected NPV with Option the flexibility option 23 $270 24 Note: If the expected NPV without the flexibility option is negative, the project would not be 25 undertaken, in which case the project would have no effect on firm value (NPV = 0). 26 27 VALUE OF OPTION = $270 SEE TEST 2 What are input flexibility options and output flexibility options? How do flexibility options affect projects NPVs and risk? DI e DALL F5 F6 F7 N
Purchase answer to see full attachment