Principles of Corporate Finance
13th Edition
ISBN: 9781260465099
Author: BREALEY, Richard
Publisher: MCGRAW-HILL HIGHER EDUCATION
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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
- 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 $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?
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?
Explain the importance of studying time value of money.
Case study
a. Let's say your friend offer simple investment. You are planning to buy an asset
for RM 335. This investment is very safe. You would sell off the asset in three
years for RM 400. You know you could invest RM 335 elsewhere at 10 percent
with very little risk. What do you think of the proposed investment?
Chapter 10 Solutions
Principles 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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