Real Options.

A. JTM Airlines, where you work, is looking at potentially buying more gates at their home airport. If it pays the airport $1M, JTM will hold exclusive rights to buy those gates for $8M (at the start) and $9M (one year later) at any time in the next 3 years. The option expires at the end of year 3. JTM's discount rate is 6.6%and the risk free rate is 2%. What is the NPV of the gate purchases if it bought them today? Use the data in the Excel template provided.

B. After you run the numbers for part A, you remember back to your ERAU corporate finance class's coverage of real options. You know that the 3-yearoption has value, so you decide to calculate it by:

1.Present valuing the purchase price of the gates separately using the risk-free rate. Once JTM decides to go ahead with the purchase, there is no risk to that expenditure.

2. Present valuing the Net Cash Flow excluding those purchase prices. This calculation will include Cap. Ex. for years 3-15 as they are part of the normal operation of the gates and are unrelated to the purchase price.

3. Use the Black-Scholes Option Pricing formula to come up with option's price assuming a 5-year maturity and a 55% price volatility for gate prices.

4.Compare the price of the call option as calculated using the BSO formula with the NPV in the No Real Options scenario. With this, you can decide whether or not the $1M option is worth it. Is it?What is the value of the option over not taking it? What is it net of the $1M cost?

I JUST NEED SOMEONE TO CHECK MY WORK AND VERIFY. THE SPREADSHEET IS BELOW: (if anymore info is needed from me, please let me know. thanks so much! you guys and gals are the best!

A B C D E F G H I J K L M N O P Q R S JTM Airlines 2 Rates: 3 Discount rate 6.6% 4 Risk-free rate 2.0% Scenario: No Real Options 1 2 3 4 5 6 8 9 10 11 12 13 14 15 Cash from Operations 5.0 5.6 6.2 6.8 7.4 8.C 8.6 9.2 9.8 10.4 11.0 11.6 12.2 12.8 13.4 8 minus: Capital Expenditures 8.0 9.0 2.0 2.3 2.6 2.9 3.2 3.5 3.8 4.1 4.4 4.7 5.0 5.3 5.6 9 = Net Cash Flow (3.0) (3.4) 4.2 4.5 4.8 5.1 5.4 5.7 6.0 6.3 6.6 6.9 7.2 7.5 7.8 10 Terminal Value 55.0 11 PV of NCF 58.4 12 Scenario: Real Options Option Pricing: 13 IN 3 4 7 9 10 11 12 13 14 15 PV of Cap. Ex. (Yrs. 1-2) 15.4 14 Cash from Operations 5.0 56 62 5.8 7.4 8.0 8.6 9.2 9.8 10.4 11.0 11.6 12.2 12.8 13.4 Maturity 5.0 15 minus: Capital Expenditures 2.0 2.3 2.6 2.9 3.2 3.5 3.8 4.1 4.4 4.7 5.0 5.3 5.6 PV of NCF 58.4 16 = Net Cash Flow 5.0 5.6 4.2 4.5 4.8 5.1 5.4 5.7 6.0 6.3 6.6 5.9 7.2 7.5 7.8 Risk free rate 2.0% 17 Terminal Value 55.0 Volatility 55% 18 PV of NCF 73.9 BS calculations: 19 PV of Cap. Ex. (Yrs. 1-2) 15.4 d1 1.78 20 N(d1) 0.96 21 12 0.55 22 N(d2) 0.71 23 Price of call 46.3 24 Difference: 25 - Value of Option over PV (5.0) 26 - % of PV 0% 27 28 29 Text answer here. 30 31