A Japanese company called Hype Investments is considering investing in a Tractor Manufacturing Plant in Zimbabwe. The
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Question:
The possibility of generating these cash flows is given by 10%, 50% and 40% respectively. The CFO of Hype Investments believes that the value of the project emanates from the uncertainty surrounding the future cash flows. In the event that the project does not succeed, the company can abandon the project by finding suitable buyers. However the projects manager is of the view that the operating environment is too volatile such that investing in such a project is value destroying for shareholders. She highlights that waiting for a couple of years before embarking on the project might be value adding since the economy is expected to stabilize while at the same time new information comes in. You are appointed as project consultant to offer advice to Hype Investment management on the best decision to take. Assume a 10% discount rate.
i. Advise the firm on the best course of action to take considering the Zimbabwean economic environment.
ii. Determine the standard deviation of the project and explain the implication of that value.
Related Book For
Management Accounting Information for Decision-Making and Strategy Execution
ISBN: 978-0137024971
6th Edition
Authors: Anthony A. Atkinson, Robert S. Kaplan, Ella Mae Matsumura, S. Mark Young
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