PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Chapter 10, Problem 25PS
Real options An auto plant that costs $100 million to build can produce a line of flex-fuel cars. The investment will produce cash flows with a present value of $140 million if the line is successful but only $50 million if it is unsuccessful. You believe that the probability of success is only about 50%. You will learn whether the line is successful immediately after building the plant.
- a. Would you build the plant?
- b. Suppose that the plant can be sold for $95 million to another automaker if the auto line is not successful. Now would you build the plant?
- c. Illustrate the option to abandon in part (b) using a decision tree.
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An auto plant that costs $170 million to build can produce a line of flexfuel cars that will produce cash flows with a present value of $240 million if the line is successful but only $80 million if it is unsuccessful. You believe that the probability of success is only about 50%. You will learn whether the line is successful immediately after building the plant.
a-1. Calculate the expected NPV. (Do not round intermediate calculations. A negative amount should be indicated by a minus sign. Enter your answers in millions rounded to 1 decimal place.)
a-2. Would you build the plant?
Suppose that the plant can be sold for $140 million to another automaker if the auto line is not successful. (Do not round intermediate calculations. A negative amount should be indicated by a minus sign. Enter your answers in millions rounded to 1 decimal place.)
b-1. Calculate the expected NPV.
b-2. Would you build the plant?
An auto plant that costs $100 million to build can produce a line of flexfuel cars that will produce cash flows with a present value of $140 million if the line is successful but only $50 million if it is unsuccessful. You believe that the probability of success is only about 50%. You will learn whether the line is successful immediately after building the plant.
a-1.Calculate the expected NPV. (Do not round intermediate calculations. A negative amount should be indicated by a minus sign. Enter your answer in millions.)
a-2.Would you build the plant?
Suppose that the plant can be sold for $95 million to another automaker if the auto line is not successful.
b-1. Calculate the expected NPV. (Do not round intermediate calculations. A negative amount should be indicated by a minus sign. Enter your answer in millions rounded to 1 decimal place.)
b-2. Would you build the plant?
Suppose you are considering building a factory that produces
turbo jets. Price of a turbo jet right now is $200.
Next year the price could go up to $220 or go down to $180 or
stay at $200 with equal probabilities.
The price then remains fixed for a long time. (This assumption
makes this cash flow risky). This will be your revenue.
Cost of factory is $300 and it can be built right away since you
have infrastructure in place.
WACC is 30%. Cost of debt is 10%.
You have the option to wait one year and see whether the price
goes up or down and then invest only if price is above $180?
What is the NPV?
414.22
167.52
312.82
566.67
Chapter 10 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 10 - Terminology Match each of the following terms to...Ch. 10 - Project analysis True or false? a. Sensitivity...Ch. 10 - Sensitivity analysis Otobais staff (see Section...Ch. 10 - Prob. 4PSCh. 10 - Prob. 7PSCh. 10 - Scenario analysis What is the NPV of the electric...Ch. 10 - Prob. 9PSCh. 10 - Break-even analysis Break-even calculations are...Ch. 10 - Prob. 11PSCh. 10 - Prob. 12PS
Ch. 10 - Prob. 13PSCh. 10 - Break-even analysis A financial analyst has...Ch. 10 - Fixed and variable costs In a slow year, Deutsche...Ch. 10 - Operating leverage You estimate that your cattle...Ch. 10 - Prob. 17PSCh. 10 - Prob. 20PSCh. 10 - Real options Explain why options to expand or...Ch. 10 - Prob. 22PSCh. 10 - Real options True or false? a. Decision trees can...Ch. 10 - Prob. 24PSCh. 10 - Real options An auto plant that costs 100 million...Ch. 10 - Decision trees Look back at the Vegetron electric...Ch. 10 - Prob. 27PSCh. 10 - Prob. 28PSCh. 10 - Prob. 29PSCh. 10 - Prob. 32PS
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