TheAmericanSatelliteEnergyCorporation(ASEC)hasidentifiedanaggressivenewenergyprojectwhereinthefirmwouldplaceanetworkofsolarpanelsatellitesintoearthorbitforaninitialinvestmentof$1.2billionandbeamelectricenergytothesurfacethroughmicrowavetechnology.With50%probability,thisprojectwillgenerateperpetualCFATsof$750millionperyearwiththefirstcashflowarriving5yearsafterinitialinvestment(t=5).With50%probability,theprojectwouldnotbecompetitiveduetothediscoveryofoffshoreoilreserves,andwouldgenerateperpetualCFATsof$0peryear.(Therefore,ASECexpectsadeferredperpetuityof$750millionor$0withequalchance.)TheWACCappropriateforthisprojectis20%. a.) Calculate DCF-NPV for this investment. b.) NowsupposethatASECwilllearnsoonafterinvestingwhethertheaboveprojectwillfail(generate$0CFATsinperpetuity)ornot.However,ASECrecognizesthatiftheaboveprojectfails,itcouldretoolthesolarpanelnetworkfornegligiblecost(free)andsellpowertoanexpandedinternationalspacestationtogenerateexpectedperpetualCFATSof$600millionperyearwiththefirstcashflowarrivinginyear10(t=10). Whatisthevalueofthisalternativeuseoptionatt=0? (NotethatthisalternativeuseisonlyavailableifASECretoolsthesolarpanelnetworksuchthatitcannotbothbeamenergytotheplanetsurfaceandsupplyenergytotheInternationalSpaceStation.Thatis,beamingelectricenergytotheplanetsurfaceandpoweringtheInternationalspacestationaremutuallyexclusive.) c.) WhatistheNPV(inclusiveoftheoption)ofthisproject iftheflexibilityofthealternativeuse(option)topowertheInternationalspacestationrequiresanadditionalinitial $10millioninvestment (att=0)tomakethisalternativeuseafuturepossibilitythatis,the optionhasacost
Question:
TheAmericanSatelliteEnergyCorporation(ASEC)hasidentifiedanaggressivenewenergyprojectwhereinthefirmwouldplaceanetworkofsolarpanelsatellitesintoearthorbitforaninitialinvestmentof$1.2billionandbeamelectricenergytothesurfacethroughmicrowavetechnology.With50%probability,thisprojectwillgenerateperpetualCFATsof$750millionperyearwiththefirstcashflowarriving5yearsafterinitialinvestment(t=5).With50%probability,theprojectwouldnotbecompetitiveduetothediscoveryofoffshoreoilreserves,andwouldgenerateperpetualCFATsof$0peryear.(Therefore,ASECexpectsadeferredperpetuityof$750millionor$0withequalchance.)TheWACCappropriateforthisprojectis20%.
a.) Calculate DCF-NPV for this investment.
b.) NowsupposethatASECwilllearnsoonafterinvestingwhethertheaboveprojectwillfail(generate$0CFATsinperpetuity)ornot.However,ASECrecognizesthatiftheaboveprojectfails,itcouldretoolthesolarpanelnetworkfornegligiblecost(free)andsellpowertoanexpandedinternationalspacestationtogenerateexpectedperpetualCFATSof$600millionperyearwiththefirstcashflowarrivinginyear10(t=10).Whatisthevalueofthisalternativeuseoptionatt=0?(NotethatthisalternativeuseisonlyavailableifASECretoolsthesolarpanelnetworksuchthatitcannotbothbeamenergytotheplanetsurfaceandsupplyenergytotheInternationalSpaceStation.Thatis,beamingelectricenergytotheplanetsurfaceandpoweringtheInternationalspacestationaremutuallyexclusive.)
c.) WhatistheNPV(inclusiveoftheoption)ofthisprojectiftheflexibilityofthealternativeuse(option)topowertheInternationalspacestationrequiresanadditionalinitial$10millioninvestment(att=0)tomakethisalternativeuseafuturepossibilitythatis,theoptionhasacost?
Expert Answer:
