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 they've 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 (49%), and low (31%)? 2. Holding everything else constant, what is the expected NPV of the decision if the probabilities for the three scenarios are as follows: high (28%), medium (41%), and low (31%)? 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 (4%, 5%, 6%) and weighted-average cost of capital (8%, 9%, 10%, 11%, and 12%). For example, one cell in your table would be the estimated NPV of the project if the risk-free rate of interest is 4% and the weighted-average cost of capital is 8%. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 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 (49%), and low (31%)? (Enter your answers in millions. Do not round intermediate calculations. Round your final answers to 3 decimal places.) Scenario NPV (@t= 0) High Medium Low Total Required 1 Required 2 Required 3 Holding everything else constant, what is the expected NPV of the decision if the probabilities for the three scenarios are as follows: high (28%), medium (41%), and low (31%)? (Enter your answers in millions. Do not round intermediate calculations. Round your final answers to 3 decimal places.) Scenario NPV (@t= 0) High Medium Low Total Required 1 Required 2 Required 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 (4%, 5%, 6%) and weighted-average cost of capital (8%, 9%, 10%, 11%, and 12%). For example, one cell in your table would be the estimated NPV of the project if the risk-free rate of interest is 4% and the weighted average cost of capital is 8%. (Enter your answers in millions. Do not round intermediate calculations. Round your final answers to 2 decimal places.) Show less Risk-Free Rate 4% 5% 6% WACC 8% WACC 9% WACC 10% WACC 11% WACC 12% Decision Trees: Real Options Analysis (Investment-Timing Option) Source: Microsoft Excel : H I J K Weighted NPV $14.956 $ 7.081 $ (22.146) $ (0.109) A B C D E E F G 1 Panel A: Expected NPV--Invest in Project Today (time 0); amounts in $ millions 2 3 Discount rate (WACC) = 15.00% 4 4 5 Cash Outflow Market Demand End-of-Period Cash Inflows NPV of 6 (@time 0 (Scenario) Probability 1 2 3 Scenario 7 High 0.25 S 70 $ 70 $ 70 $ 59.826 8 Medium 0.50 S 50 $ 50 $ 50 $14.161 8 Low 0.25 $5 $ 5 S5 S (88.584) 10 1.00 Expected NPV = 11 12 Panel B: Expected NPV-- Delay Investment by One Year, Only if NPV is Increased; amounts in $ millions 13 14 Discount rate (WACC) = ) 15.00% 15 Risk-free rate = 5.00% 16 Cash outflow in one year = S 100 17 18 Market Demand End-of-Period Cash Inflows 19 (Scenario) Probability 1 2 3 4 20 High 0.25 S (100) $ 70 $ 70 $ 70 21 Medium 0.50 S (100) $ 50 $ 50 $50 22 Low 0.25 $0 $0 SO SO 23 1.00 24 *discounted at risk-free rate of interest 25 fdiscounted at WACC (weighted average cost of capital); formula for cell 120: =PV(B14,1,(PV(B14,3.E20))) 26 #formula for cell J20: =(120+H20)*C20 PV of Cash PV of Cash Outflows Inflowst $ (95.238) $ 138.979 $(95.238) $ 99.271 $ 0.000 $ 0.000 Expected NPV = Weighted NPV @time of $ 10.935 S 2.016 S0.000 $ 12.951 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 they've 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 (49%), and low (31%)? 2. Holding everything else constant, what is the expected NPV of the decision if the probabilities for the three scenarios are as follows: high (28%), medium (41%), and low (31%)? 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 (4%, 5%, 6%) and weighted-average cost of capital (8%, 9%, 10%, 11%, and 12%). For example, one cell in your table would be the estimated NPV of the project if the risk-free rate of interest is 4% and the weighted-average cost of capital is 8%. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 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 (49%), and low (31%)? (Enter your answers in millions. Do not round intermediate calculations. Round your final answers to 3 decimal places.) Scenario NPV (@t= 0) High Medium Low Total Required 1 Required 2 Required 3 Holding everything else constant, what is the expected NPV of the decision if the probabilities for the three scenarios are as follows: high (28%), medium (41%), and low (31%)? (Enter your answers in millions. Do not round intermediate calculations. Round your final answers to 3 decimal places.) Scenario NPV (@t= 0) High Medium Low Total Required 1 Required 2 Required 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 (4%, 5%, 6%) and weighted-average cost of capital (8%, 9%, 10%, 11%, and 12%). For example, one cell in your table would be the estimated NPV of the project if the risk-free rate of interest is 4% and the weighted average cost of capital is 8%. (Enter your answers in millions. Do not round intermediate calculations. Round your final answers to 2 decimal places.) Show less Risk-Free Rate 4% 5% 6% WACC 8% WACC 9% WACC 10% WACC 11% WACC 12% Decision Trees: Real Options Analysis (Investment-Timing Option) Source: Microsoft Excel : H I J K Weighted NPV $14.956 $ 7.081 $ (22.146) $ (0.109) A B C D E E F G 1 Panel A: Expected NPV--Invest in Project Today (time 0); amounts in $ millions 2 3 Discount rate (WACC) = 15.00% 4 4 5 Cash Outflow Market Demand End-of-Period Cash Inflows NPV of 6 (@time 0 (Scenario) Probability 1 2 3 Scenario 7 High 0.25 S 70 $ 70 $ 70 $ 59.826 8 Medium 0.50 S 50 $ 50 $ 50 $14.161 8 Low 0.25 $5 $ 5 S5 S (88.584) 10 1.00 Expected NPV = 11 12 Panel B: Expected NPV-- Delay Investment by One Year, Only if NPV is Increased; amounts in $ millions 13 14 Discount rate (WACC) = ) 15.00% 15 Risk-free rate = 5.00% 16 Cash outflow in one year = S 100 17 18 Market Demand End-of-Period Cash Inflows 19 (Scenario) Probability 1 2 3 4 20 High 0.25 S (100) $ 70 $ 70 $ 70 21 Medium 0.50 S (100) $ 50 $ 50 $50 22 Low 0.25 $0 $0 SO SO 23 1.00 24 *discounted at risk-free rate of interest 25 fdiscounted at WACC (weighted average cost of capital); formula for cell 120: =PV(B14,1,(PV(B14,3.E20))) 26 #formula for cell J20: =(120+H20)*C20 PV of Cash PV of Cash Outflows Inflowst $ (95.238) $ 138.979 $(95.238) $ 99.271 $ 0.000 $ 0.000 Expected NPV = Weighted NPV @time of $ 10.935 S 2.016 S0.000 $ 12.951