Whirlpool Europe

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Whirlpool Europe Analysis

The Whirlpool Europe case provides an opportunity to look at different ways to evaluate a major IT investment the company is considering. To undertake this analysis we have to make a few assumptions because the case does not have all the details needed to estimate benefits and investment cost. However, if you were in a company faced with this situation, these numbers would be available.

The spreadsheet for Whirlpool contains two worksheets. Worksheet 1 is a net present value analysis, and worksheet 2 applies an options pricing model to the decision.

Be sure to save a copy of the spreadsheet when you download it because most of the questions refer back to the original spreadsheet, which you will often

7. What are you buying an option to do?

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8. Given an option cost of \$4 million and the value of the option in worksheet 2, should Whirlpool proceed or abandon the project? ______________ ___________

9. Suppose that Whirlpool finds a way to reduce the costs of the project by 5%. Please change the cost factor in cell G31 to 95%. What is the value of the option now?

________________. Would you proceed with the pilot under these costs? ________

10. Returning the cost factor to 100%, what happens to the value of the option if the risk free interest rate doubles to 8%?

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11. Returning the risk free rate to 4%, what happens to the value of the option if the Whirlpool’s cost of capital goes from 9% to 15%?

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12. Please return the cost of capital to 9%. Sigma squared is the variance in the rate of return of the project. The calculations for the variance are in the first table of worksheet 2. Determining sigma squared is one of the most challenging tasks in calculating the value of a real option. In this example, we suggest asking managers for their best and worst case estimates of the