jenny rene the cdo if asor products inc has just completed an evaluation of a proposed capital expenditure for equipment that would expand the firms manufacturing capacity using the traditional NPV methodology she found the project unacceptable because: NPVtraditional =-1499before recommending rejection of the proposed project she has decided to assess whether real options might be embedded in the firms cash flow's revaluation uncovered three options and their probability

option 1 abandonment the pressure could be abandoned at the end of three years resulting in an addition to MPV OF $1,150.

option 2 growth if the project outcome occurs and opportunity to expand the firms product offerings further would become available at the end of four years. Exercise of this option is estimated to add $2570 to the projects NPV

Option 3 timing certain phases of the proposed project could be delayed if market or competitive conditions caused the firms forecast revenues to develop more slowly than planned. Search a delay in implementation at that point has NPV of $10,100.

Jenny estimated that there was 30% chance that the abandonment option would need to be exercised a 25% chance that the growth option would be exercised and only a 10% chance at the implementation of certain phases of the project would affect timing.

a. useless information provided to calculate the strategic NPV, NPVstratigic1 for asornproduxrs proposed equipment expenditure.

b. on the basis of your findings in part a Y action should Jenny recommend to management with regard to the proposed equipment expenditure?

c. in general how does this problem demonstrate the importance of considering real options when making capital budget decisions?

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