6. Valuing the growth option with the Black-Scholes option pricing model Real option analysis can be used to alter the timing, scale, or other aspects of an investment in response to market conditions. Businesses face the dilemma of whether to invest in a project or shendon it does not add value to the firm Real option analysis allow financial managers to determine the financial consequences of this newbility and the value of the option Blue Gorilla Media Company, a social networking company, has seen triple-digit growth in its website's registrations over the past two years. Most of the website's subscribers live outside the United States, and the company is seeing a significant increase in the number of users from Brazil. As a result, Blue Gorilla is considering opening a marketing office in Brazil to expand its marketing efforts there. Management, however, is not sure if the Brazilian expansion via the opening di a subsidiary office will necessarily help the company grow and increase its value. Management's uncertainty is the result of the possibility that Brazil's Internet connectivity will be insufficient to support all of Blue Gorilla's forecasted growth. One of Blue Gorilla's employees, Natalia, who is originally from Brazil, conducted some preliminary market research and submitted the following details about the potential five-year project: years. Opening the new marketing office in Brazil will require an initial investment of $5.00 milion . According to research on Brazi's mobile technology infrastructure, Natalia noted there is a 60% probability that the country's mobile connectivity will be sufficient to generate additional advertising cash flows of $7.50 million per year for the company for the next five Alternatively, there is a 40% chance that Brazil's mobile Internet connectivity will be insufficient to support blue Gorilla's desired growth in Brazil. In this case, the company expects to generate additional net advertising-related annual cash flows of only $2.50 million for the next five years. The project's expected cost of capital is 13.00%, and the risk-free rate is 4%. The project's WACC should be used to discount all cash flows Given this information, the project's expected net present value (NPV) without the consideration of the growth option is Round all calculations to two decimal places.) (Note: 58.61 million After further research, Natalia added a few more details to her proposal $20.09 million $14.35 million If Brazil's Internet connectivity is good, then at the end of Year 3, Blue Gorilla should consider investing $3.75 m31.57 million in existing Brazilian marketing firm and creating a new subsidiary. The new subsidiary is expected to generate $3.00 million of additional annual cash flows in years 4 and year 5. However, if the Internet connectivity in Brazil is inadequate to support Blue Gor's desired customer growth, then the company will not invest the additional funds in year or earn the expected additional advertising-related cash flows ased on additional informat the Vic the growth in the cate me of the growth on the theme to use the project cost of capital to deal Value NPV of the with the Growth 0 * Last want to see the act-Scholes con pong moet to deathe value of the growth option to do this, she has colected and come the values to love and as you reach Series Oution for the valuation of an option . V = x(0,3 - (XXN). the current or proprio of the value of of the delayed preth forecast future cash flows (d) and (da) estimates of the variance of the price x - the option's strike price, which is the cost of purchasing the format will become Grubudiary the mathematical constantequal to 2.7180856234595450350 runde 2.7183 the market's risk-free rate te the time until the option expres, which in this situation, med when the potential purchase of the wiary would take place According to tell, these variables should me the following the Value Variable Projects cost of capital Current value of the delayed restent Nedlas estimated by Natal Ndil, as estimated by Natalia Devenement price 0.7573 0.2012 S010 101 2.7180 0.04 500 min Given these as the state le ore Gore growth calculations we cale) MacBook FC 80 6. Valuing the growth option with the Black-Scholes option pricing model Real option analysis can be used to alter the timing, scale, or other aspects of an investment in response to market conditions. Businesses face the dilemma of whether to invest in a project or shendon it does not add value to the firm Real option analysis allow financial managers to determine the financial consequences of this newbility and the value of the option Blue Gorilla Media Company, a social networking company, has seen triple-digit growth in its website's registrations over the past two years. Most of the website's subscribers live outside the United States, and the company is seeing a significant increase in the number of users from Brazil. As a result, Blue Gorilla is considering opening a marketing office in Brazil to expand its marketing efforts there. Management, however, is not sure if the Brazilian expansion via the opening di a subsidiary office will necessarily help the company grow and increase its value. Management's uncertainty is the result of the possibility that Brazil's Internet connectivity will be insufficient to support all of Blue Gorilla's forecasted growth. One of Blue Gorilla's employees, Natalia, who is originally from Brazil, conducted some preliminary market research and submitted the following details about the potential five-year project: years. Opening the new marketing office in Brazil will require an initial investment of $5.00 milion . According to research on Brazi's mobile technology infrastructure, Natalia noted there is a 60% probability that the country's mobile connectivity will be sufficient to generate additional advertising cash flows of $7.50 million per year for the company for the next five Alternatively, there is a 40% chance that Brazil's mobile Internet connectivity will be insufficient to support blue Gorilla's desired growth in Brazil. In this case, the company expects to generate additional net advertising-related annual cash flows of only $2.50 million for the next five years. The project's expected cost of capital is 13.00%, and the risk-free rate is 4%. The project's WACC should be used to discount all cash flows Given this information, the project's expected net present value (NPV) without the consideration of the growth option is Round all calculations to two decimal places.) (Note: 58.61 million After further research, Natalia added a few more details to her proposal $20.09 million $14.35 million If Brazil's Internet connectivity is good, then at the end of Year 3, Blue Gorilla should consider investing $3.75 m31.57 million in existing Brazilian marketing firm and creating a new subsidiary. The new subsidiary is expected to generate $3.00 million of additional annual cash flows in years 4 and year 5. However, if the Internet connectivity in Brazil is inadequate to support Blue Gor's desired customer growth, then the company will not invest the additional funds in year or earn the expected additional advertising-related cash flows ased on additional informat the Vic the growth in the cate me of the growth on the theme to use the project cost of capital to deal Value NPV of the with the Growth 0 * Last want to see the act-Scholes con pong moet to deathe value of the growth option to do this, she has colected and come the values to love and as you reach Series Oution for the valuation of an option . V = x(0,3 - (XXN). the current or proprio of the value of of the delayed preth forecast future cash flows (d) and (da) estimates of the variance of the price x - the option's strike price, which is the cost of purchasing the format will become Grubudiary the mathematical constantequal to 2.7180856234595450350 runde 2.7183 the market's risk-free rate te the time until the option expres, which in this situation, med when the potential purchase of the wiary would take place According to tell, these variables should me the following the Value Variable Projects cost of capital Current value of the delayed restent Nedlas estimated by Natal Ndil, as estimated by Natalia Devenement price 0.7573 0.2012 S010 101 2.7180 0.04 500 min Given these as the state le ore Gore growth calculations we cale) MacBook FC 80