Part 1 Homework
Part 2 Homework
NPV and ANPV decisions Personal Finance Problem Richard and Linda Butler decide that it is time to purchase a high-definition (HD) television because the technology has improved and prices have fallen over the past 3 years. From their research, they narrow their choices to two sets, the Samsung 64-inch plasma with 1080p capability and the Sony 64-inch plasma with 1080p features. The price of the Samsung is $2,365 and the Sony will cost $2,675. They expect to keep the Samsung for 3 years, if they buy the more expensive Sony unit, they will keep the Sony for 4 years. They expect sell the Samsung for $410 by the end of 3 years, they expect to sell the Sony for $355 at the end of the year 4. Richard and Linda estimate that the end-of-year entertainment benefits (i.e., not going to movies or events and watching at home) from the Samsung to be $920 and for the Sony to be $1,045. Both sets can be viewed as quality units and are equally risky purchases. They estimate their opportunity cost to be 9.5%. The Butlers wish to choose the better alternative from a purely financial perspective. To perform this analysis they wish to do the following: a. Determine the NPV of the Samsung HD plasma TV. b. Determine the ANPV of the Samsung HD plasma TV. c. Determine the NPV of the Sony HD plasma TV. d. Determine the ANPV of the Sony HD plasma TV. e. Which set should the Butlers purchase and why? a. The NPV of the Samsung HD LCD is $ b. The ANPV of the Samsung HD LCD is $ c. The NPV of the Sony HD LCD is S d. The ANPV of the Sony HD LCD is $ e. Which set should the Butlers purchase and why? (Select from the drop-down menus.) Richard and Linda should select the set because its ANPV of Vis greater than the ANPV of the set. Real options and the strategic NPV Jenny Rene, the CFO of Asor Products, Inc., has just completed an evaluation of a proposed capital expenditure for equipment that would expand the firm's manufacturing capacity. Using the traditional NPV methodology, she found the project unacceptable because: NPVtraditional = - $1,5070 Before recommending rejection of the proposed project, she has decided to assess whether real options might be embedded in the firm's cash flows. Her evaluation uncovered three options and their probability: Option 1: AbandonmentThe project could be abandoned at the end of 3 years, resulting in an addition to NPV of $1,270. Option 2: Growth If the projected outcomes occurred, an opportunity to expand the firm's product offerings further would become available at the end of 4 years. Exercise of this option is estimated to add $3,620 to the project's NPV. Option 3: Timing-Certain phases of the proposed project could be delayed if market and competitive conditions caused the firm's forecast revenues to develop more slowly than planned. Such a delay in implementation at that point has an NPV of $9,700. Jenny estimated that there was a 20% chance that the abandonment option would need to be exercised, a 35% chance that the growth option would be exercised, and only a 5% chance that the implementation of certain phases of the project would affect timing. a. Use the information provided to calculate the strategic NPV, NPV strategic, for Asor Products' proposed equipment expenditure. b. On the basis of your findings in part (a), what 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 budgeting decisions? a. The value of the real options is $ The strategic NPV is $ b. Judging from your findings in part (a), what action should Jenny recommend to management with regard to the proposed equipment expenditure? Accept or Reject c. In general, how does this problem demonstrate the importance of considering real options when making capital budgeting decisions? (Select the best answer below.) O A. No. Projects should be evaluated based on their NPV without considering embedded options OB. Yes. Embedded options are used to calculate the NPV traditional. O C. No. Embedded options are hard-to-quantify and usually strategic in nature so including them is not worth the effort. OD. Yes. Embedded options could cause an otherwise unacceptable project to become acceptable. NPV and ANPV decisions Personal Finance Problem Richard and Linda Butler decide that it is time to purchase a high-definition (HD) television because the technology has improved and prices have fallen over the past 3 years. From their research, they narrow their choices to two sets, the Samsung 64-inch plasma with 1080p capability and the Sony 64-inch plasma with 1080p features. The price of the Samsung is $2,365 and the Sony will cost $2,675. They expect to keep the Samsung for 3 years, if they buy the more expensive Sony unit, they will keep the Sony for 4 years. They expect sell the Samsung for $410 by the end of 3 years, they expect to sell the Sony for $355 at the end of the year 4. Richard and Linda estimate that the end-of-year entertainment benefits (i.e., not going to movies or events and watching at home) from the Samsung to be $920 and for the Sony to be $1,045. Both sets can be viewed as quality units and are equally risky purchases. They estimate their opportunity cost to be 9.5%. The Butlers wish to choose the better alternative from a purely financial perspective. To perform this analysis they wish to do the following: a. Determine the NPV of the Samsung HD plasma TV. b. Determine the ANPV of the Samsung HD plasma TV. c. Determine the NPV of the Sony HD plasma TV. d. Determine the ANPV of the Sony HD plasma TV. e. Which set should the Butlers purchase and why? a. The NPV of the Samsung HD LCD is $ b. The ANPV of the Samsung HD LCD is $ c. The NPV of the Sony HD LCD is S d. The ANPV of the Sony HD LCD is $ e. Which set should the Butlers purchase and why? (Select from the drop-down menus.) Richard and Linda should select the set because its ANPV of Vis greater than the ANPV of the set. Real options and the strategic NPV Jenny Rene, the CFO of Asor Products, Inc., has just completed an evaluation of a proposed capital expenditure for equipment that would expand the firm's manufacturing capacity. Using the traditional NPV methodology, she found the project unacceptable because: NPVtraditional = - $1,5070 Before recommending rejection of the proposed project, she has decided to assess whether real options might be embedded in the firm's cash flows. Her evaluation uncovered three options and their probability: Option 1: AbandonmentThe project could be abandoned at the end of 3 years, resulting in an addition to NPV of $1,270. Option 2: Growth If the projected outcomes occurred, an opportunity to expand the firm's product offerings further would become available at the end of 4 years. Exercise of this option is estimated to add $3,620 to the project's NPV. Option 3: Timing-Certain phases of the proposed project could be delayed if market and competitive conditions caused the firm's forecast revenues to develop more slowly than planned. Such a delay in implementation at that point has an NPV of $9,700. Jenny estimated that there was a 20% chance that the abandonment option would need to be exercised, a 35% chance that the growth option would be exercised, and only a 5% chance that the implementation of certain phases of the project would affect timing. a. Use the information provided to calculate the strategic NPV, NPV strategic, for Asor Products' proposed equipment expenditure. b. On the basis of your findings in part (a), what 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 budgeting decisions? a. The value of the real options is $ The strategic NPV is $ b. Judging from your findings in part (a), what action should Jenny recommend to management with regard to the proposed equipment expenditure? Accept or Reject c. In general, how does this problem demonstrate the importance of considering real options when making capital budgeting decisions? (Select the best answer below.) O A. No. Projects should be evaluated based on their NPV without considering embedded options OB. Yes. Embedded options are used to calculate the NPV traditional. O C. No. Embedded options are hard-to-quantify and usually strategic in nature so including them is not worth the effort. OD. Yes. Embedded options could cause an otherwise unacceptable project to become acceptable
