Expansion options * Look again at the valuation in Table 22.2 of the option to invest in the Mark II project. Consider a change in each of the following inputs. Would the change increase or decrease the value of the expansion option? a. Increased uncertainty (higher standard deviation). b. More optimistic forecast (higher expected value) of the Mark II in 1985. c. Increase in the required investment in 1985.

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Answer 1

Textbook Question

Chapter 22, Problem 1PS

Expansion options* Look again at the valuation in Table 22.2 of the option to invest in the Mark II project. Consider a change in each of the following inputs. Would the change increase or decrease the value of the expansion option?

a. Increased uncertainty (higher standard deviation).
b. More optimistic forecast (higher expected value) of the Mark II in 1985.
c. Increase in the required investment in 1985.

a.

Expert Solution

Summary Introduction

To discuss: The changes if there is an increase in uncertainty.

Explanation of Solution

The reasons on the changes if there is an increase in uncertainty is as follows:

The worth of the expansion options increase if the uncertainty increases.

b.

Expert Solution

Summary Introduction

To discuss: The changes if there is more optimistic forecast.

Explanation of Solution

The reasons on the changes if there is more optimistic forecast is as follows:

The worth of the expansion options increases due to this the expected cash flows are higher. This caused due to the increase in the more optimistic forecast.

c.

Expert Solution

Summary Introduction

To discuss: The changes if there is an increase in required investment.

Explanation of Solution

The reasons on the changes if there is an increase in required investment is as follows:

The worth of the expansion options decrease if there is an increase in the required investment.

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Students have asked these similar questions

Use the Black-Scholes formula to find the value of the following call option.i. Time to expiration 1 year.ii. Standard deviation 40% per year.iii. Exercise price $50.iv. Stock price $50.v. Interest rate 4% (effective annual yield).Now recalculate the value of this call option, but use the following parameter values.Each change should be considered independently.i. Time to expiration 2 years.ii. Standard deviation 50% per year.iii. Exercise price $60.iv. Stock price $60.v. Interest rate 6%.c. In which case did increasing the value of the input not increase your calculation of option value?

Which of the following statements is true? Select one of the options i. – iii.The future value of an investment (A) after two years with an annualcompound interest (i) isi. less than the future value of the investment (A) after two years withsimple interest (i)ii. equals to the future value of the investment (A) after two years withsimple interest (i)iii. greater than the future value of the investment (A) after two years withsimple interest (i).

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Answer 2

Textbook Question

Chapter 22, Problem 1PS

Expansion options* Look again at the valuation in Table 22.2 of the option to invest in the Mark II project. Consider a change in each of the following inputs. Would the change increase or decrease the value of the expansion option?

a. Increased uncertainty (higher standard deviation).
b. More optimistic forecast (higher expected value) of the Mark II in 1985.
c. Increase in the required investment in 1985.

a.

Expert Solution

Summary Introduction

To discuss: The changes if there is an increase in uncertainty.

Explanation of Solution

The reasons on the changes if there is an increase in uncertainty is as follows:

The worth of the expansion options increase if the uncertainty increases.

b.

Expert Solution

Summary Introduction

To discuss: The changes if there is more optimistic forecast.

Explanation of Solution

The reasons on the changes if there is more optimistic forecast is as follows:

The worth of the expansion options increases due to this the expected cash flows are higher. This caused due to the increase in the more optimistic forecast.

c.

Expert Solution

Summary Introduction

To discuss: The changes if there is an increase in required investment.

Explanation of Solution

The reasons on the changes if there is an increase in required investment is as follows:

The worth of the expansion options decrease if there is an increase in the required investment.

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Answer 3

Textbook Question

Chapter 22, Problem 1PS

Expansion options* Look again at the valuation in Table 22.2 of the option to invest in the Mark II project. Consider a change in each of the following inputs. Would the change increase or decrease the value of the expansion option?

a. Increased uncertainty (higher standard deviation).
b. More optimistic forecast (higher expected value) of the Mark II in 1985.
c. Increase in the required investment in 1985.

a.

Expert Solution

Summary Introduction

To discuss: The changes if there is an increase in uncertainty.

Explanation of Solution

The reasons on the changes if there is an increase in uncertainty is as follows:

The worth of the expansion options increase if the uncertainty increases.

b.

Expert Solution

Summary Introduction

To discuss: The changes if there is more optimistic forecast.

Explanation of Solution

The reasons on the changes if there is more optimistic forecast is as follows:

The worth of the expansion options increases due to this the expected cash flows are higher. This caused due to the increase in the more optimistic forecast.

c.

Expert Solution

Summary Introduction

To discuss: The changes if there is an increase in required investment.

Explanation of Solution

The reasons on the changes if there is an increase in required investment is as follows:

The worth of the expansion options decrease if there is an increase in the required investment.

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Answer 4

Textbook Question

Chapter 22, Problem 1PS

Expansion options* Look again at the valuation in Table 22.2 of the option to invest in the Mark II project. Consider a change in each of the following inputs. Would the change increase or decrease the value of the expansion option?

a. Increased uncertainty (higher standard deviation).
b. More optimistic forecast (higher expected value) of the Mark II in 1985.
c. Increase in the required investment in 1985.

a.

Expert Solution

Summary Introduction

To discuss: The changes if there is an increase in uncertainty.

Explanation of Solution

The reasons on the changes if there is an increase in uncertainty is as follows:

The worth of the expansion options increase if the uncertainty increases.

b.

Expert Solution

Summary Introduction

To discuss: The changes if there is more optimistic forecast.

Explanation of Solution

The reasons on the changes if there is more optimistic forecast is as follows:

The worth of the expansion options increases due to this the expected cash flows are higher. This caused due to the increase in the more optimistic forecast.

c.

Expert Solution

Summary Introduction

To discuss: The changes if there is an increase in required investment.

Explanation of Solution

The reasons on the changes if there is an increase in required investment is as follows:

The worth of the expansion options decrease if there is an increase in the required investment.

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Answer 5

Textbook Question

Answer 6

Textbook Question

Answer 7

a.

Expert Solution

Summary Introduction

To discuss: The changes if there is an increase in uncertainty.

Explanation of Solution

The reasons on the changes if there is an increase in uncertainty is as follows:

The worth of the expansion options increase if the uncertainty increases.

b.

Expert Solution

Summary Introduction

To discuss: The changes if there is more optimistic forecast.

Explanation of Solution

The reasons on the changes if there is more optimistic forecast is as follows:

The worth of the expansion options increases due to this the expected cash flows are higher. This caused due to the increase in the more optimistic forecast.

c.

Expert Solution

Summary Introduction

To discuss: The changes if there is an increase in required investment.

Explanation of Solution

The reasons on the changes if there is an increase in required investment is as follows:

The worth of the expansion options decrease if there is an increase in the required investment.

Answer 8

a.

Expert Solution

Summary Introduction

To discuss: The changes if there is an increase in uncertainty.

Explanation of Solution

The reasons on the changes if there is an increase in uncertainty is as follows:

The worth of the expansion options increase if the uncertainty increases.

Answer 9

a.

Expert Solution

Answer 10

a.

Expert Solution

Answer 11

Expert Solution

Answer 12

Summary Introduction

To discuss: The changes if there is an increase in uncertainty.

Answer 13

Explanation of Solution

The reasons on the changes if there is an increase in uncertainty is as follows:

The worth of the expansion options increase if the uncertainty increases.

Answer 14

b.

Expert Solution

Summary Introduction

To discuss: The changes if there is more optimistic forecast.

Explanation of Solution

The reasons on the changes if there is more optimistic forecast is as follows:

The worth of the expansion options increases due to this the expected cash flows are higher. This caused due to the increase in the more optimistic forecast.

Answer 15

b.

Expert Solution

Answer 16

b.

Expert Solution

Answer 17

Expert Solution

Answer 18

Summary Introduction

To discuss: The changes if there is more optimistic forecast.

Answer 19

Explanation of Solution

The reasons on the changes if there is more optimistic forecast is as follows:

The worth of the expansion options increases due to this the expected cash flows are higher. This caused due to the increase in the more optimistic forecast.

Answer 20

c.

Expert Solution

Summary Introduction

To discuss: The changes if there is an increase in required investment.

Explanation of Solution

The reasons on the changes if there is an increase in required investment is as follows:

The worth of the expansion options decrease if there is an increase in the required investment.

Answer 21

c.

Expert Solution

Answer 22

c.

Expert Solution

Answer 23

Expert Solution

Answer 24

Summary Introduction

To discuss: The changes if there is an increase in required investment.

Answer 25

Explanation of Solution

The reasons on the changes if there is an increase in required investment is as follows:

The worth of the expansion options decrease if there is an increase in the required investment.

Answer 26

Ch. 22 - Expansion options Look again at the valuation in...Ch. 22 - Prob. 2PS Ch. 22 - Prob. 3PS Ch. 22 - Prob. 4PS Ch. 22 - Prob. 5PS Ch. 22 - Prob. 6PS Ch. 22 - Real options True or false? a. Real-options...Ch. 22 - Prob. 8PS Ch. 22 - Prob. 9PS Ch. 22 - Expansion options Look again at Table 22.2. How...

Solution Summary: The author enumerates the reasons for the changes if there is an increase in uncertainty.

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