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Posted on Aug 15, 2024

The required rate of return or discount rate that is appropriate to evaluate the case outlined below is 0.1 (stated as a decimal). Enter the

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The required rate of return or discount rate that is appropriate to evaluate the case outlined below is 0.1 (stated as a decimal). Enter the discount rate stated above as the answer. Enter the decimal as it is presented. QUESTION 2 Real Option Analysis - Post 3 Use the cost of capital provided in the first question to answer the following questions. Build all of your analysis within an EXCEL worksheet. Post your EXCEL worksheet online as post 3 in the discussion board attach your EXCEL worksheet to this question. 1. You were hired by a firm that analyzes sports video and compiles statistics that are then provided to the customer. The firm is called SA (Sports Analysis). Please describe in general to the software developers what real option analysis is. ACTION - EXPLAIN REAL OPTION ANALYSIS BRIEFLY IN YOUR OWN WORDS. 2. The firm is considering a project that with the following cash flows. Is this a good or bad project based on your analysis (compute NPV at a minimum). Use the interest rate given in question #1. Project Soccer is expected to cost-200,000 and have cash flows of $50,000 in each of the next six years. ACTION - EVALUATE PROJECT SOCCER GIVEN THE ABOVE INFORMATION. 3. New information has come available in which a competitor may enter the market. You believe that there is a 40% chance the competitor will enter the market. If the competitor enters the market your cost will not change, but your expected cash flows will be $30,000 in each of the next six years. If you invest now you do not know if the competitor will or will not be in the market. ACTION - EVALUATE THE NPV GIVEN THE POSSIBLITY OF A COMPETITOR 4. An option the firm has is to wait a year and see if the other firm decides to enter the market. Using the same cash flow assumptions ($50,000 CF with no competitor and $30,000 CF with a competitor) evaluate the NPV given this option. Note if you wait you will know prior to your initial cost if the competitor will or will not enter the market. ACTION -EVALUATE THE NPV GIVEN THE OPTION TO DELAY ACTION - COMPUTE THE VALUE OF THE DELAY OPTION 5. Finally assume that the firm has another opportunity to invest $1 million in the soccer market. The investment will return $100,000 in each of the next four years. The initial investment will allow for the option to earn a contract that is valued at $2M at year five. The probability of earning this contract is 50%. ACTION - COMPUTE THE VALUE OF THIS PROJECT GIVEN THE OPTION TO EXPAND (EARN THE CONTRACT). The required rate of return or discount rate that is appropriate to evaluate the case outlined below is 0.1 (stated as a decimal). Enter the discount rate stated above as the answer. Enter the decimal as it is presented. QUESTION 2 Real Option Analysis - Post 3 Use the cost of capital provided in the first question to answer the following questions. Build all of your analysis within an EXCEL worksheet. Post your EXCEL worksheet online as post 3 in the discussion board attach your EXCEL worksheet to this question. 1. You were hired by a firm that analyzes sports video and compiles statistics that are then provided to the customer. The firm is called SA (Sports Analysis). Please describe in general to the software developers what real option analysis is. ACTION - EXPLAIN REAL OPTION ANALYSIS BRIEFLY IN YOUR OWN WORDS. 2. The firm is considering a project that with the following cash flows. Is this a good or bad project based on your analysis (compute NPV at a minimum). Use the interest rate given in question #1. Project Soccer is expected to cost-200,000 and have cash flows of $50,000 in each of the next six years. ACTION - EVALUATE PROJECT SOCCER GIVEN THE ABOVE INFORMATION. 3. New information has come available in which a competitor may enter the market. You believe that there is a 40% chance the competitor will enter the market. If the competitor enters the market your cost will not change, but your expected cash flows will be $30,000 in each of the next six years. If you invest now you do not know if the competitor will or will not be in the market. ACTION - EVALUATE THE NPV GIVEN THE POSSIBLITY OF A COMPETITOR 4. An option the firm has is to wait a year and see if the other firm decides to enter the market. Using the same cash flow assumptions ($50,000 CF with no competitor and $30,000 CF with a competitor) evaluate the NPV given this option. Note if you wait you will know prior to your initial cost if the competitor will or will not enter the market. ACTION -EVALUATE THE NPV GIVEN THE OPTION TO DELAY ACTION - COMPUTE THE VALUE OF THE DELAY OPTION 5. Finally assume that the firm has another opportunity to invest $1 million in the soccer market. The investment will return $100,000 in each of the next four years. The initial investment will allow for the option to earn a contract that is valued at $2M at year five. The probability of earning this contract is 50%. ACTION - COMPUTE THE VALUE OF THIS PROJECT GIVEN THE OPTION TO EXPAND (EARN THE CONTRACT)