Your company is considering purchasing 10 machines, each of which has the following expected cash flows (the
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Your company is considering purchasing 10 machines, each of which has the following expected cash flows (the entry in B4 of −$550 is the cost of the machine):
You estimate the appropriate discount rate for the machines as 25 percent.
a. Would you recommend buying just one machine, if there are no options effects?
b. Your purchase manager recommends buying one machine today and then—after seeing how the machine operates—reconsidering the purchase of the other nine machines in six months. Assuming that the cash fl ows from the machines have a standard deviation of 30 percent and that the risk-free rate is 10 percent, value this strategy.
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