Reference no: EM131108818
Jenny Rene, the CFO of Asor Products, Inc., has just completed an evaluation of a proposed capital expenditure for equipment that would expand the firm's manufacturing capacity. Using the traditional NPV methodology, she found the project unacceptable because
NPVtraditional = -$1,700 < $0
Before recommending rejection of the proposed project, she has decided to assess whether there might be real options embedded in the firm's cash flows. Her evaluation uncovered three options:
Option 1: Abandonment- The project could be abandoned at the end of 3 years, resulting in an addition to NPV of $1,200.
Option 2: Growth- If the projected outcomes occurred, an opportunity to expand the firm's product offerings further would become available at the end of 4 years. Exercise of this option is estimated to add $3,000 to the project's NPV.
Option 3: Timing- Certain phases of the proposed project could be delayed if market and competitive conditions caused the firm's forecast revenues to develop more slowly than planned. Such a delay in implementation at that point has an NPV of $10,000.
Jenny estimated that there was a 25% chance that the abandonment option would need to be exercised, a 30% chance that the growth option would be exercised, and only a 10% chance that the implementation of certain phases of the project would affect timing.
a. Use the information provided to calculate the strategic NPV, NPV strategic, for Asor Products' proposed equipment expenditure.
b. Judging on the basis of your findings in part a, what action should Jenny recommend to management with regard to the proposed equipment expenditure?
c. In general, how does this problem demonstrate the importance of considering real options when making capital budgeting decisions?
|
How does the execution time of your algorithm
: How does the execution time of your algorithm (as measured in number of execution steps) grow as the number of fields increases?
|
|
What age do children stop receiving the option
: At what age do children stop receiving the option of being on their parents' healthcare plan under President Obama's new healthcare bill?
|
|
What is the stated value of a common share at june
: What is the stated value of a common share at June 30, 2015? At what price per share did Delicious Deserts issue its common shares during the year?
|
|
Meet the insurance needs of typical insureds
: Please remember that you must do your own work. Any plagiarism will result in a grade of zero for all students involved. Please use your own words even if you are using the textbook for answers. Always provide a citation when a reference is used.
|
|
How does this problem demonstrate the importance of consider
: Judging on the basis of your findings in part a, what action should Jenny recommend to management with regard to the proposed equipment expenditure? In general, how does this problem demonstrate the importance of considering real options when making ..
|
|
Determining the annual depreciation
: Calculate the CAPEx for depreciation, assuming the annual depreciation is $1,000,000 and the new investment is $1,500,000. What does CAPEx stand for?
|
|
How activation across multiple brain regions
: Briefly explain using one piece of evidence (e.g., experimental, brain damage, etc.) how activation across multiple brain regions is required for conscious awareness of visual information.
|
|
Define a code generator for this ast structure
: Define a code generator for this AST structure. (You may generate JVM code or code for any other computer architecture).
|
|
Question regarding the internal rate of return
: Define the term "internal rate of return". Assume an investment of $50,000 with an expected return of $15,000 per year for 5 years. What is the approximate internal rate of return?
|