Question
Your management team has put together the following projections for a project that your company may be interested in implementing. Demand Probability Annual Cash Flow
Your management team has put together the following projections for a project that your company may be interested in implementing.
Demand | Probability | Annual Cash Flow |
High | 20% | $100,000,000.00 |
Average | 60% | $40,000,000.00 |
Low | 20% | $10,000,000.00 |
Project's cost of capital | 12% | |
Life of project | 3 | |
Required investment | $75,000,000.00 |
Use this information to answer the following questions.
1- Use the decision-tree procedure to project the expected standard deviation for the proposed project, ignoring any real option.
[Round the final answer to the nearest cent]
2- Use the decision-tree procedure to project the expected NPV for the proposed project, considering an investment timing option to wait one year before implementation.
[Round the final answer to the nearest cent]
3- Use the decision-tree procedure to project the expected standard deviation for the proposed project, considering an investment timing option to wait one year before implementation.
[Round the final answer to the nearest cent]
4-Use the decision-tree procedure to project the expected option value for the proposed project, considering an investment timing option to wait one year before implementation.
[Round the final answer to the nearest cent]
5- Use the Black-Scholes model to calculate the value of the timing option to wait one year if the strike price is the cost of the project, the risk-free rate is 2.5%, and the variance in future cash flows is 0.25.
[Round the final answer to the nearest cent]
6-Use the decision-tree procedure to project the expected NPV for the proposed project, considering a growth option to launch a second-generation project with the same cost and cash flows.
[Round the final answer to the nearest cent]
7-Use the decision-tree procedure to project the expected standard deviation for the proposed project, considering a growth option to launch a second-generation project with the same cost and cash flows.
[Round the final answer to the nearest cent]
8-Use the decision-tree procedure to project the expected option value for the proposed project, considering a growth option to launch a second-generation project with the same cost and cash flows.
[Round the final answer to the nearest cent]
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