Question
Chelmsford Manufacturing is considering launching a new product. They estimate that if Chelmsford launches the product this year it will have an NPV of $17
Chelmsford Manufacturing is considering launching a new product. They estimate that if Chelmsford launches the product this year it will have an NPV of $17 million. Chelmsford has the option to wait one year to launch the toy, however, the demand next year will depend upon what new products Chelmsford's competitors introduce and therefore greater uncertainty about next year's demand. Launching the new product today will involve a total capital expenditure of $70 million. If the riskfree rate is 4%, N(d1) is .62 and N(d2) is .65, then what is the value of the option to wait until next year to launch the new product? (Hint: current asset value (S) equals the sum of capex and NPV)
Correct answer is $ 10.19 million. Please, explain your calculation
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started