Refer to the XYZ Company example in the chapter and the results in Panels A and B of Exhibit 12.7. On the basis of this information, management of the company has decided to delay the implementation of the project for 1 year. Those managers are now interested in knowing how sensitive this decision is with respect to the assumptions theyve made regarding the basic analysis. Therefore, they have asked you to prepare some supplementary analyses regarding Panel B of Exhibit 12.7.

Required:

1. Holding everything else constant, what is the expected NPV of the decision if the probabilities for the three scenarios are as follows: high (20%), medium (48%), and low (32%)?

2. Holding everything else constant, what is the expected NPV of the decision if the probabilities for the three scenarios are as follows: high (26%), medium (42%), and low (32%)?

3. Prepare a 5 3 table containing the estimated NPV of the decision to delay for each combination of the following: risk-free rate of interest (6%, 7%, 8%) and weighted-average cost of capital (9%, 10%, 11%, 12%, and 13%). For example, one cell in your table would be the estimated NPV of the project if the risk-free rate of interest is 6% and the weighted-average cost of capital is 9%.

EXHIBIT 12.7 Decision Trees: Real-Options Analysis (Investment-Timing Option) Panel B: Expected NPV-Delay Investment by One Year, Only if NPV is increased, amounts in \$ millions "discounted at risk-free rate of interest " discounted at WACC (weighted-average cost of capital); formula for cell I20: =PV(B14,1,(PV(B14,3,E20))) **" formula for cell J20:=C20(120+H20)