Part I: Project without the Growth Option:

NPV (Good): You can use row 2 of the calculator with the following inputs:

CF0 = -3000; C01 = 1500; F01 = 3; I = 12; CPT NPV; NPV = $603

Note: If you don't feel comfortable using the frequency key, you can enter the cash flows as follows:

CF0 = -3000; C01 = 1500; F01 = 1; C02 = 1500; F02 = 1; C03 = 1500; F03 =1

You follow the same procedure for the bad outcome and you get NPV = -$358

Expected NPV:

(.5*603) + (.5*(-358)) = $122

Standard Deviation:

SQRT[..5(603-122)^2 + .5(-358-122)^2] = $480

CV:

480/122 = 3.93

Part II: Project with the Option

The calculations are identical to part I. When you follow the calculations noted above, you get the following numbers:

Expected NPV = $1,503

Std. Dev. = $1,861

CV = 1.24

Part III: Value of the Option

Value of the option is the expected NPV with the option - expected NPV without the option. In this case:

Value of the option = $1,503 - $122 = $1,381

This is for 13.1. Im posting below 13.3 table, I need same computations

ailu OtnEr Topics in Capital Budgeting 447 FIGURE 13.3 Analysis of a Timing Option (Dollars in Thousands) 3Part I. Project Without the Timing Option Cash Flow at End of Period Outcome Prob. O 12% $3,000 $2,000$2,000 $2,000 Bad 50% -$3,000 -$1,919 Expected NPV Standard Deviation (a) Coefficient of Variation-CV = , Expected NPV 12 Part We Know the Market Conditions Cash Flow at End of Period 14 15 16 12% Good Bad 50% $0 $0 18 19 Expected NPV Standard Deviation (a) NPV Coefficient of Variation = C-o/ Ex Part III. Value of the Option Expected NPV with the timing option Expected NPV without the timing option 23 CASE 1: If the expected NPV without the timing option is positive, then Expected NPV with the timing option Expected NPV without the timing option Value of the Option 27 28 CASE 2: If the expected NPV without the timing option is negative, then Value of the OptionExpected NPV with the timing option 0 Note: If the expected NPV without the timing option is negative, the project would not be undertaken, in which case the project would have no effect on firm value (NPV 0) VALUE OF OPTION 170 Note: Under the Delay situation, we must find the NPV as of t o. If we set the cash flow for t 0 at $0 then using a calculator or Excel, we automatically find the NPV att - o. However, if we let CF.--3000, CF-2000, N, = 2, and l/YR = 12, we get an NPV-$380 under the Good outcome and an expected NPV of $190. Note, though, that these NPVs are as of t -1, so we must discount them back 1 year at 12% to achieve comparability with the NPV calculated for not delaying the project and arrive at the correct