You are considering a project that has been assigned a discount rate of 14 percent. If you start the project today, you will incur an initial cost of $8,500 and will receive cash inflows of $5,550 a year for two years. If you wait one year to start the project, the initial cost will rise to $9,200 and the cash flows will increase to $5,800 a year for two years. What is the value of the option to wait?
Value of option to wait = $307.57 - $638.97 = -$331.40 |
82.
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Southern Shores is considering a project that has an initial cost today of $13,000. The project has a two-year life with cash inflows of $7,500 a year. Should the firm opt to wait one year to commence this project, the initial cost will increase by 5 percent and the cash inflows will increase to $8,500 a year. What is the value of the option to wait if the applicable discount rate is 12 percent?
Value of option to wait = $638.78 - (-$324.62) = $963.40 |
83.
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Western Industrial Products is considering a project with a four-year life and an initial cost of $212,000. The discount rate for the project is 16 percent. The firm expects to sell 9,600 units on the last day of each year. The cash flow per unit is $50. The firm will have the option to abandon this project at the end of year one (after year one's sales) at which time the project's assets could be sold for an estimated $125,000. The firm should abandon the project at the end of year one if the expected level of annual sales, starting with year 2, falls to _____ units or less. Ignore taxes.
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84.
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Dressler Technologies is considering a project with a 3-year life and an initial cost of $87,000. The discount rate for the project is 14.5 percent. The firm expects to sell 1,300 units on the last day of each year. The cash flow per unit is $32. The firm will have the option to abandon this project at the end two years (after year 2 sales) at which time the project's assets could be sold for an estimated $30,000. The firm's managers are interested in knowing how the project will perform if the sales forecast for year 3 of the project is revised such that there is a 50/50 chance that the sales will be either 1,000 or 1,400 units a year. What is the net present value of this project at time zero given the current sales forecasts?
Level to abandon = $30,000 = $32Q/1.145; Q = 1,073.44 units
At 1,000 units, you will abandon the project and receive $30,000 at the end of year 2. At 1,400 units, you will continue the project and the project will have a value at the end of year 2 of: NPVEnd of year 2 = (1,400 × $32)/1.145 = $39,126.64 The NPV of this project today is: |
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