Determine the present value of store, Financial Management

Assume that ABC is considering opening an ice cream shop in Amsterdam. The shop will cost 1.8 million Euros, and the present value of the expected cash flows from the store is 1.4 million Euros. Thus, by itself, the shop has a negative NPV of  €0.4 million. Assume, however, that by opening this shop, ABC acquires the option to expand into a much larger ice cream and dessert shop any time over the next 5 years. The cost of expansion will be €4 million, and it will be undertaken only if the present value of the expected cash flows exceeds €5 million. At the moment, the present value of the expected cash flows from the expansion is believed to be only €4 million. If it were not, ABC would have opened the larger shop right away. ABC  still does not know much about the market for its ice cream and desserts in the Netherlands, and there is considerable uncertainty about this estimate: the annual standard deviation of the returns on the larger shop is 0.3. The risk-free interest rate is 3% per year. 

a) Construct the five-year price tree for the larger shop using Dt = 1 year.

b) Since ABC can open the larger shop at any time, determine the nodes in the tree that you constructed in part a) at which it is optimal to open the shop (we are assuming that the decision to open the shop will be discussed at ABC only once per year). Modify the tree to reflect the early exercise of the option.

c) Determine the present value of the option of opening the larger store. Does it make sense for ABC to invest in the loss-making, smaller shop now?

Posted Date: 3/2/2013 7:15:20 AM | Location : United States







Related Discussions:- Determine the present value of store, Assignment Help, Ask Question on Determine the present value of store, Get Answer, Expert's Help, Determine the present value of store Discussions

Write discussion on Determine the present value of store
Your posts are moderated
Related Questions
The following information pertains to Fairways Driving Range, Inc.: The company is considering operating a new driving range facility in Sanford, FL. In order to do so, they wi

RWE Enterprises is a small manufacturer in Adelaide South Australia, feed suppliments for cattle. New production line NPV, Payback period and discounted payback period

These securities are backed by income-producing real estate, usually in the form of warehouses, shopping centers, apartments, office buildings, senior housi

What is accumulated depreciation? Depreciation is the provision of an asset's initial cost over time.  Accumulated depreciation is the sum of all the depreciation expense that

A company has a total investment of Rs 500,000 in assets, and 50,000 outstanding ordinary shares at Rs 10 per share (par value). It earns a rate of 15 per cent on its investment, a

Dividends and interest payments Payment  of  dividends  and  interest  can  either  be  demonstrated under financing activities or  under operating activities. Sum of the 3

A. Joe wants to invest in Nebraska Municipal 6% GOB that are rated AA. Joe's tax rate is usually between 28% .  GE plans to sell AA rated 8% coupon bonds. Compute Joe's after-tax i

A pharmaceutical company, named "XYZ", plans to deliver trials to three different clinics (C1, C2, and C3). The trials are used for the emergency treatments so XYZ must fulfill all

Q. Explain Accept-Reject Criteria? Accept-Reject Criteria:- If actual ARR is elevated than the predetermined rate of return .......................Project would be accep

Testing the Hypothesis To test the null hypothesis, we compare the observed and the expected frequencies. If the actual and the expected values are nearly equal to each other w