24. Real options (S10.3) An auto plant that costs $100 million to build can produce a line...
Question:
24. Real options (S10.3) An auto plant that costs $100 million to build can produce a line of electric cars. The investment will produce cash flows with a present value of $140 million if the line is successful but only $50 million if it is unsuccessful. You believe that the probability of success is only about 50%. You will learn whether the line is successful immediately after building the plant.
a. Would you build the plant?
b. Suppose that the plant can be sold for $95 million to another automaker if the auto line is not successful. Now would you build the plant?
c. Illustrate the option to abandon in part
(b) using a decision tree.
Step by Step Answer:
Principles Of Corporate Finance
ISBN: 9781264080946
14th Edition
Authors: Richard Brealey, Stewart Myers, Franklin Allen, Alex Edmans