A company is considering investing in a project. If the market condition is good, the project...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
A company is considering investing in a project. If the market condition is good, the project payoff is 32,000, with probability 0.3. If the market condition is normal, the project payoff is 10,000, with probability 0.2. If the market condition is bad, the project payoff is 2,000 (the probability is 1 minus the sum of above two probabilities) The initial investment is 14,000. The firm needs to borrow money from a VC to finance this investment. After extensive research, the firm finds that if the market condition is good, the company could investment addition money 3,000 to expand operations, which would result in twice the original payoff. The VC provides the firm an option to borrow the additional investment if needed. How much is this expansion option worth? A company is considering investing in a project. If the market condition is good, the project payoff is 32,000, with probability 0.3. If the market condition is normal, the project payoff is 10,000, with probability 0.2. If the market condition is bad, the project payoff is 2,000 (the probability is 1 minus the sum of above two probabilities) The initial investment is 14,000. The firm needs to borrow money from a VC to finance this investment. After extensive research, the firm finds that if the market condition is good, the company could investment addition money 3,000 to expand operations, which would result in twice the original payoff. The VC provides the firm an option to borrow the additional investment if needed. How much is this expansion option worth?
Expert Answer:
Answer rating: 100% (QA)
SOLUTION To evaluate the expansion option we need to calculate the expected val... View the full answer
Related Book For
Fundamentals of Financial Management
ISBN: 978-0324597707
12th edition
Authors: Eugene F. Brigham, Joel F. Houston
Posted Date:
Students also viewed these finance questions
-
Managing Scope Changes Case Study Scope changes on a project can occur regardless of how well the project is planned or executed. Scope changes can be the result of something that was omitted during...
-
Homework-2 DECISION ANALYSIS PROBLEMS Problem-1: Kenneth Brown is the principal owner of Brown Oil, Inc. After quitting his university teaching job, Ken has been able to increase his annual salary by...
-
The National Food Processing Company is considering investing in plant modernization and plant expansion. These proposed projects would be completed in two years, with varying requirements of money...
-
A mortgage loan officer uses math on a continual basis during the mortgage lending process. When a prospective borrower applies for a loan, many calculations are made: debt-to-income- ratio,...
-
The speedometer reading (v) on a car was observed at 1-minute intervals and recorded in the chart. Use Simpsons Rule to estimate the distance traveled by the car. I (min) v (mi/h) # (mi/h) I (min) 56...
-
When an open metal pipe is cut into two pieces, the lowest resonance frequency for the air column in one piece is 256 Hz and that for the other is 440 Hz. (a) What resonant frequency would have been...
-
Prepare the current assets section of the balance sheet as of December 31,2010, for Lipton, Inc., using the following information: Accounts Receivable. Petty Cash.. Cash in Bank Accounts Inventory......
-
During the school year, the Homebush School band arranges concert dates in many communities. Because only part of the school??s travel expenses are covered by the concert admission fees, the band...
-
Please explain how income is treated differently in terms of filing taxes than from an accounting perspective?
-
The proposed rates were not in the range the CEO expected given the pricing analysis. The CEO has asked the pricing actuary to verify the total projected loss cost excluding potential large storm...
-
What would you do if you learned that a new hire is making more than you make after 5 years experience doing the same job? What factors might justify this disparity?
-
1. Define Operational and Business risk. 2. How does operational and business risklead to bank failures? 3. Provide some general background on the history of Guaranty Bank. What led to the bank's...
-
Swift Skateboards sells unassembled skateboards for $65 each. Variable production costs for each board are $10 and fixed production costs are $18. Swift is considering selling the skateboards fully...
-
What are three main categories of ratios and provide a specific example of a ratio that is used in each category? How is ratio used in managerial decision-making? What are the advantages and...
-
26 data values were collected for liters of gas pumped. The mean amount was found to be 45 L with a standard deviation of 7 L. Construct a 99% confidence interval for the mean number of liters pumped
-
Harvard Business Review read that then answer these questions In the last few years, leadership in many companies has become obsessed with productivity to manage their operations. Do you agree with...
-
The National Marine Ministry wanted to establish a jetty at the outer small island of Moapa. This jetty would provide access to mainland of Moapa. There were two villages on the outer island Siros...
-
In your readings, there were many examples given for nurturing close family relationships in this ever-evolving technological society we live in Based upon your readings and research describe three...
-
What is an equivalent annual annuity (EAA)? When and how are EAAs used in capital budgeting?
-
Answer the following questions: a. Assuming a rate of 10% annually, find the FV of $1,000 after 5 years. b. What is the investments FV at rates of 0%, 5%, and 20% after 0, 1, 2, 3, 4, and 5 years? c....
-
What is a firms intrinsic value? its current stock price? Is the stocks true long-run value more closely related to its intrinsic value or to its current price?
-
Consider the quarterly real GDP of United Kingdom, Canada, and the United States from the first quarter of 1980 to the second quarter of 2011. The data are available from the Federal Reserve Bank of...
-
Derive the error-correction form in Equation (5.68) for a \(\operatorname{VAR}(p)\) model. P-1 Azt = zt-p+Azti + c(t) + (B)at, i=1 (5.68)
-
Housing markets in the United States have been under pressure since the 2007 subprime financial crisis. In this problem, we consider the housing starts for the West and South regions of U.S. Census....
Study smarter with the SolutionInn App