Question
1a)What is the value of AA if it does not have access to Project L? What is the NPV of Project L? 1b)Perform a real
1a)What is the value of AA if it does not have access to Project L? What is the NPV of Project L?
1b)Perform a real options valuation of Project L. In your answer be sure to detail the value of Project L at each state (e.g. what is Project L worth at year 2 after two rounds of good news) as well as the optimal investment decision in each state. Given your analysis, what is the value of Project L and what is Tennant Ventures' exit valuation of AA?
1c)What is the value of the real option in Project L? Explain the source of value for this real option.
1d) Suppose that if AA receives bad news in year 1, it has the option to "go for broke" instead of the "regular" investment (note that AA can go for broke only in this specific scenario). Going for broke costs 10m, but is risky; it has only a 20% chance of success (and an 80% chance of failure). If going for broke succeeds, AA will find itself next year in a position as if it had received two rounds of good news (and no rounds of bad news). That is, if going for broke succeeds, AA "overcomes" its previous bad news. Failure is equivalent to a second round of bad news. What is the value of the option to go for broke? (Be sure to show any additional working needed relative to part (c)).
1e) What is the minimum probability of success required for the option to go for broke to be valuable?
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