In the previous problem, suppose the scale of the project can be doubled in one year in the sense that twice as many units can be produced and sold. Naturally, expansion would only be desirable if the project were a success. This implies that if the project is a success, projected sales after expansion will be 26,000. Again assuming that success and failure are equally likely, what is the NPV of the project? Note that abandonment is still an option if the project is a failure. What is the value of the option to expand?
Answer to relevant QuestionsIn the previous problem, suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to within ±10 percent. Calculate the best-case and worst-case NPV figures. In Problem 26, suppose you’re confident about your own projections, but you’re a little unsure about Detroit’s actual machine screw requirement. What is the sensitivity of the project OCF to changes in the quantity ...You are considering investing in a company that cultivates abalone for sale to local restaurants. Use the following information: The discount rate for the company is 13 percent, the initial investment in equipment is ...A stock has had the following year-end prices and dividends: What are the arithmetic and geometric returns for the stock? A stock has a beta of 1.25, the expected return on the market is 11.5 percent, and the risk-free rate is 3.4 percent. What must the expected return on this stock be?
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