Eurocargoair is a British private air courier firm that has been given the option to purchase three
Question:
Eurocargoair is a British private air courier firm that has been given the option to purchase three new small jets at the price of £3 million per plane. The purchase agreement is only valid for the next 3 months before the offer is removed from the table. The company is also in negotiation with another firm for three similar jets but the purchase price has not yet been agreed. The firm’s financial managers believe that there is an 80 per cent chance that they can purchase the planes elsewhere for £2.7 million each. If they are unsuccessful in negotiations, they will only be able to arrange a deal of £3.6 million per plane elsewhere. Negotiations will conclude in 3 months and the outcome will be unknown until then. Eurocargoair can borrow or lend at 3.5 per cent per annum. What is the value of the option to buy the jets at £3 million per plane?
Step by Step Answer:
Corporate Finance
ISBN: 9780077173630
3rd Edition
Authors: David Hillier, Stephen A. Ross, Randolph W. Westerfield, Bradford D. Jordan, Jeffrey F. Jaffe