I can pay upto $100 to someone who does all this, file is attached but it has to be 100% accurate as the assignment weight 40%.

3.5 is no more required, so changes are;

3.6Assuming that the change in revenues are as persection 3.4 above,calculate the implied price of the embedded option using the Black & Scholes option pricing formula.

(Hint: You will need to estimate the volatility of the option from analysis of the probability adjusted NPVs from section 3.4)

3.7Explain why a difference, if any, exists between your answer inSection 3.4 and 3.6.

3.8Recommend as to whether the project should proceed, and what the impact of the embedded optionality will be on the overall project.

BFF5250 Corporate Treasury Management S2 2017 david.m.robinson@monash.edu August 2017 Highly Confidential Project Project name: Polar Bear 1 1. Background As a company involved in the provision of aviation services to the worldwide commercial aerospace and government/defense industries, your allocated company is currently considering expansion of its facilities to work with the Defence Department and commercial aircraft in Alaska. Fort Richardson, which is located near Anchorage, is the largest US base in Alaska and is the hub of a network of bases in the area that includes Fort Greeley and Fort Wainwright. All of these bases can utilise the services of your allocated company. 2. Details regarding the highly confidential project Your allocated company is considering an expansion of its current operating activities via the provision of a service and production facility in Alaska. The project is to be developed in two phases. Commencing in 2018, an initial smaller facility will be installed in Anchorage in Alaska. Once the facility is commissioned in Phase 1, and it is operational, it is expected that defence force contracting may give your allocated company the opportunity at the end of year 4 to expand services and production by implementing an expansion of the original project (Phase 2). The following information is relevant to each of the two phases of the project. 1 BFF5250 Corporate Treasury Management S2 2017 david.m.robinson@monash.edu August 2017 2.1 Phase 1 Details of Phase 1 are as follows: Cash flows can be projected for the first 10 years, after which the project is expected to run in perpetuity. No services will be provided during the establishment phase in year 1 and no production will occur in years 1 and 2. The initial cost of establishing the project will involve land, building, regulatory and setup costs of $150.0m, which will be spread equally at the project inception and at the end of year 1 of the project. Due to the remote location, depeciation is allowed on a straight-line basis over a period of 5 years. No salvage value is anticipated at the end of the depreciation periods. For the project revenue over the first five years is expected to be: Year 1 2 3 4 5 Revenue form Services ($,m) 0 44.5 55 56.2 70 Revenue from Production ($,m) 0 0 50.3 65 65 The revenue from services is expected to grow in years 6 to 10 at a rate of 5 percent per annum (p.a.) and the revenue from production is expected to grow in years 6 to 10 at a rate of 4 percent p.a. The growth in cash flows from services and production is expected to drop to 2.50 percent for all cash flows p.a. in perpetuity beyond year 10. Cost associated with Service revenue is 25 percent of revenue p.a. and costs associated with Production revenue are 70 percent of the revenue p.a. Costs such as Selling, General & Administrative (SG&A) expenses are set at 15 percent of revenue p.a. Maintenance costs are expected to be set at 5.00 percent of revenue p.a. The corporate tax rate is 40 percent and tax losses must be carried forward. The risk-adjusted hurdle rate used to assess the project is 15 percent p.a. Net Working capital is expected to be as follows in each of the first 6 years. From year 6 onwards, the level will be fixed at the year 6 level. Year 1 2 3 4 5 6 Net working Capital ($, m) 0 20.0 320 40.0 65.4 75.0 2 BFF5250 Corporate Treasury Management S2 2017 david.m.robinson@monash.edu August 2017 2.2 Phase 2 Details of Phase 2 are as follows: Investment in Phase 1 is a pre-requisite for investment in Phase 2. The two Phases are not independent of each other. The First Phase contains an option to expand production in Phase 2. If Phase 2 is to proceed, the embedded option must be exercised at the end of Year 4 of Phase 1. This expansion will require the acquisition of land and the building and comisssioning with regulatory approval of a larger expanded plant facility. The initial cost of establishing the project will involve land, building, regulatory and commisioning costs of $40m. These costs will be incurred at the commencement of the first year of Phase 2. Depeciation is allowed in Phase 2 on a straight-line basis over a period of 5 years. No Services and Production can be provided in year 1 of Phase 2. For the project, the revenue from services and production will be as follows for the first five years: Year (Phase 2) 1 2 3 4 5 Revenue form Services ($,m) 0 22.5 24.0 35.0 46.0 Revenue from Production ($,m) 0 12.5 22.5 38.6 40.0 The revenue from services is expected to grow at a rate of 2.50% p.a. in perpetuity from year 5 of Phase 2 of the project. The revenue from production in year 5 is expected to be at the capacity of the Phase 2 plant. Due to the need for ongoing maintenance in the facility, the volume used and produced are expected to only be at 80% of the year 5 capacity in perpetuity after year 5 of Phase 2 of the project. There will be no future growth in production arising from the project. Cost associated with Service revenue is 40 percent p.a. of revenue and costs associated with Production revenue are 70 percent p.a. of the revenue. Costs such as Selling, General & Administrative (SG&A) expenses are set at 20 percent of revenue p.a. Maintenance costs are expected to be set at 5.00% of revenue p.a. The corporate tax rate is 40% and tax losses must be carried forward. The risk-adjusted hurdle rate used to assess the project is 15% p.a. Net Working capital is expected to be as follows in each of the first 5 years. From year 5 onwards, the level will be fixed at the year 5 level from Phase 2. Year 1 2 3 4 5 Net working Capital ($, m) 0 20.0 25.5 51.5 60.0 3 BFF5250 Corporate Treasury Management S2 2017 david.m.robinson@monash.edu August 2017 3. Work to be performed for the Highly Confidential Project by Phoenix Consulting 3.1 Showing all cash flows calculate the NPV of the Phase 1 cash flows. 3.2 Identify if a real option exists. If it does, name the type of option and draw a decision tree to demonstrate the timing of the cash flows in the project and decisions that need to be made in the project. 3.3 Using a decision tree approach calculate the value of any embedded optionality. 3.4 Assume that at the end of year 5 of Phase 1, that the Phase 1 revenue will grow at one of the three levels in the following table during years 6 to 10. The growth rates in perpetuity for Phase 1 remain unchanged: Services revenue High growth rate Base growth rate Low growth rate Production revenue High growth rate Base growth rate Low growth rate Growth rate 5.5% 5.0% 4.0% Probability 30% 50% 20% 4.5% 4.0% 2.5% 25% 30% 45% Assuming there is no change in relation to services or production revenue in Phase 2, calculate the value of any embedded optionality based on the above assumptions and compare your answer to the response in section 3.3 above. 3.5 Assume that in Phase 2 that the revenue from services will grow at one of the three levels in perpetuity but production revenues will remain unchanged. Services revenue growth rate in perpetuity High growth rate Base growth rate Low growth rate Growth rate Probability 5.0% 2.5% -2.0% 50% 30% 10% Assuming the changes in Phase 1 revenue from section 3.4 still apply but there is no change in relation to production revenue in Phase 2, calculate the value of any embedded optionality based on the above assumptions and compare your answer to the response in section 3.3 above. 3.6 Assuming that the change in market prices are as per section 3.5 above, calculate the implied price of the embedded option, using the Black & Scholes option pricing formula. (Hint: You will need to estimate the volatility of the option from analysis of the probability-adjusted NPVs from section 3.5) 3.7 Explain why a difference, if any, exists between your answer in Section 3.5 and 3.6. 3.8 Recommend as to whether the project should proceed and what the impact of the embedded optionality will be on the overall project. 4