DCF analysis doesn't always lead to proper capital budgeting decosions because capital budocting projects are not. investments like stocks and bonds, Managers can often takt postive actions after the investment has been made to olter a project's cach flows. These opportunities are real options that offer the night but not the obligation to take same future action. Types of real options include abandonment, investment timing, expansion, output flexblity, and input flexibulity. The existence of options can prolitability, then calculated NPV/s, and their ras. projocts' expected The abandanment option is the option to shut down o project if operating cash flows tum out to be lower than expected. To analyze the abandonment option you can draw a decision tree, which is a dagram that lays out different branches that are the result of different deosions made of the result of different economic situations. When analyring real options you cotsuder the project with and without the option. The option value is calculoted as the diflerence between the expected NPvi with and without the relevant option. (if the value of the project without the option is negative and the APV of the peoject mith the eption is positive, then the option valoe is smply the calculated NPV of the option) It is the value that is not accourted for in a traditional NPV analysis and, a postive option vilue expands the firm's opportunities. vnoothies. 55Cs cro has collected the followng information regarding the proposed proped, which is expected to last 3 years: - The project can be operated at the company's Charlesten plant, which is courrently vacant. operation), the equpment is oxpected to be sald for $1,500,000 before laxes. vear of operation). - Expected high protein energr smoethe sales are as follems Year Sales 192,700,000 2. 7,790,000 3,300,000 - The project's annual operating costs (excluding depreciation) are expected to be 60s d sales. - The companys tax rate is 25%. - The company is eatremely profatile; so if any losses are incurred from the high proten energy moothe project they can be uned to partially offset taxes paid on the company. other projects. (That is, assume that if there are any tax credits related to thes propect they can be used in the war they occue.) - The project has a wace 10.0%. What a die project's expected NPV and 18R ? Hound your answers to decomal places. Do not round your intermediate calculations. - Expected high-protein energy smoothe sales are as follows: Year sales 1. $2,200,000 27,750,000 3,500,000 - The project's annual operating costs (excluding depreciation) are expected to bet 60% of sales. - The company's tax rate is 25%. - The company is extremely profitable; so if any losses are inciared from the high-protein energy smoothie project they can be used to partally offset taxes paid on the compa other projects, (That is, assume that if there are any tax credits related to this project they can be used in the vear they occur.) - The project has a WACC =10.0%. What is the project's expected NPV and the? Round your answers to 2 decimal places. Do not round your intermediste calculations. NAV IRR Should the firm accopt the project? depend on whether the "weight lows" smoothie is well received by consiamers. There is a tow chance that demand will be good, in which case the project wal prodvice after-tax cash fows of 12.1 milfion at the end of each of the noxe 3 years. There is a 60% chance that denund witt be pood, in whech case the after-tax cash flows will be 50.5 million for 3 years. If projec is mber than the firm's other propects, so it has a WMCC of 11%. The firm will know if the project is waccessful atter receiving the cash fows the first year, and after receniog the fars yoar's cash flows it will hove the option to abandon the project. If the firm deodes to abandon the project the company will not receive any cash flows after t=1, but at mill t atile to sell the assets related to the project for $2.25 malion after tases, at C=1. Assuming the company has an option to abandon the project, what is the expected Niv of the projetodav? Round your answer to 2 decimal places. Do not round your intermedate calculations. Use the values in "miltops of dellars" to ascertain the answer. miltions of deliars