Q1. Ah = 4 fyri (a) Company Alfa is considering whether or not to undertake project Bravo. It is generally accepted within the company that project Bravo will be loss- making. If (and only if) the company takes on project Bravo, however, it will become entitled, but not obliged, to undertake a second project, project Charlie. Based on market analysis, it appears that there are only two sensible points at which to commence project Charlie: either immediately, or in four years and nine months. If the project were commenced immediately, the present value of operating the project, based on its after- tax operating cash flows, would be $32m. Of that value, 18% is attributable to net cash flows forecast to occur over the next four years and nine months. The operating cash flows of the project are uncertain, and the value of the project is estimated to have a volatility of 30% p.a. (o = 0.30). The up-front cost of investing in project Charlie is $20m, whenever it is commenced. The annually-compounded risk-free rate of interest is 5%, and is not expected to change. Identify and value any real option(s) available to Alfa; and advise the company. [14 marks] (b) Net present value (NPV) analysis is, theoretically, the dominant investment appraisal method; but it is not perfect. Explain the practical difficulties in applying the technique; and discuss the shortcomings of basic NPV analysis as taught on introductory finance courses. [8 marks]