Case summary:
Company S desires to add a new line to its product mix. For this purpose the analysis of capital budgeting was conducted by person S an MBA graduate. The invoice price of the machinery is $200,000 approximately and $10,000 shipping charges are required. Installation charges are $30,000. The machinery has a 4 years’ life with a salvage value of $25000.
The new line leads to increase the sales of 1,250 units each year of 4 years and cost of $100 per unit in first year. The units are sold for $200 in the 1st year.
It results to an increase in company’s net working capital by 12% value of sales. Company’s tax rate is 40% and risk adjusted cost of capital or weighted average cost of capital for an average project is 10%.
Characters in the case:
- Company S
- Person S
To discuss: The real options and kinds of real options.
Want to see the full answer?
Check out a sample textbook solutionChapter 11 Solutions
EBK FINANCIAL MANAGEMENT: THEORY & PRAC
- What’s the difference between a financial optionand a real option? What are some specific typesof real options? Do real options just occur, or canthey be “created”?arrow_forwardWhat does the phrase "FMS option" really mean, and what does it mean?arrow_forwardWhat are the assumptions of Option-pricing models?arrow_forward
- Explain what a financial option is. Give an examplearrow_forwardYou agree to purchase a new vehicle from a car dealer for $36,000, and you want them to finance your entire purchase. The salesman sends you to their finance office, which offers you a choice between A) a four-year loan at six percent or B) a five-year loan at seven percent. What are the total payments for each (rounded to the nearest dollar)? A) Barrow_forwardDiscuss how equity can be viewed as an option. Who has theoption, and what decision can they make?arrow_forward
- Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage LearningEBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT