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Can anyone solve this PLEASE !!! DO NOT COPY FROM COURSEHERO Teekay LNG Partners L.P. is considering whether to add onboard regasificaion capacity to their
Can anyone solve this PLEASE !!! DO NOT COPY FROM COURSEHERO
Teekay LNG Partners L.P. is considering whether to add onboard regasificaion capacity to their LNG tanker fleet. Such capacity would enable the ships to function not only as modes of transport, but also as regasification platforms. Revenue from regasifying natural gas will be collected from destination countries, enhancing the company's annual cash flows. The cost of adding regasification capacity is $160 million per tanker (disregard any time lag that typically accompanies regas installation). The company currently owns 29 LNG carriers that can operate forever (for simplicity). Currently Teekay generates $150 million per year from the transportation side of its LNG shipping business. If regasification capacity is added this year, the expected annual cash flows will be $405 million per year, including this year (i.e. assuming that adding regasification capacity is almost instantaneous and increases revenue right away). Teekay's cost of capital is 10 %. The risk-free rate in the market is 2%. Calculate the value of Teekay's LNG fleet with and without regasification capacity this year. Should Teekay invest in regasification capacity for its fleet of LNG tankers this year? Global demand for LNG can change dramatically over the next year. If Teekay does not invest in regasification capacity this year, but instead decides to invest in regasification capacity next year: if LNG demand grows next year, Teekay will invest in regasification capacity and the expected cash flows will increase to $600; if the demand falls, Teekay will not invest in regasification and its cash flows will remain at $150 million dollars per year. If Teekay invests in regasification capacity next year, when the demand for LNG is known to grow, what will be the expected value of its LNG fleet this year? What is the value of the real option to delay investment in regasification capacityStep by Step Solution
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