EF4313 corporate pay I Semester A 2010 2011 Topic 2 satisfying Options Topic 2 in truth Options Main issues: I. break down NPV with Real Options II. Valuing Real Options III. dormant NPV Analysis IV. The Option to delegate in V. The Option to put out VI. The Option to Contract VII. Implications for dandy Bud scrambleing galore(postnominal) financial managers recognize that the spotless NPV approach to outstanding budgeting is short-handed in that it ignores, or cannot correctly capture, managements flexibleness to adapt and revise ulterior decisions in response to unlooked-for market developments. In the material marketplace, the originalization of cash flows leave probably differ from what managers anticipate initially. As market conditions changed, managers may have valuable flexibleness to alter their operating strategy in baffle to crackingise on favorable extravertive opportunities or mitigate losses. For example, managers may be able to defer, expand, foreshorten or abandon a project at unalike stages during its use of skilfuls and servicesful operating life. The real option approach to capital budgeting provides a new musical instrument to quantify the value of tractability from active management. I. Comparing NPV with Real Options A. A Motivating use At course 0, a firm is deciding to commit in a implement that costs $1,600.
Once pre-committed, title-holder unit of good is growd at the end of Year 1 and the capital cost willing be paid formerly the first good is get outd. separately year, the machine will produce one unit of good which is assumed to be operated forever. The priming of the good is uncertain at Year 1. It will be worth either $ccc or $ degree Celsius with a 50/50 probability. further once the price conduct becomes known at Year 1, it stays there forever. The scour aside rate is 10%. Should the firm invest? 1 EF4313 Corporate Finance I Semester A 2010 2011 Topic 2 Real Options (1) Static NPV Approach The NPV of this investment funds is: ? three hundred ? 100 ? ? ? ? NPV1 = ?0.5 Ã ? 300 + ? + 0.5 Ã ?100 + ? ? 1600 0.1 ? 0.1 ? ? ? ? ? ? = 600 NPV0 = 600 1.1 = 545.45 According...If you want to get a full essay, order it on our website: Ordercustompaper.com
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