Your company has the opportunity to invest in a project which will cost $2,900 million. With the
Question:
Your company has the opportunity to invest in a project which will cost $2,900 million. With the current political risk in the global economy, this project currently requires a very high discount rate and has a PV of future cash flows of $2,800 million. This project has a life of 15 years and the company has an opportunity to delay commencement for the next two years, so they can avoid a global recession.
The project's cash flows volatility is the same as the volatility of company's returns, and the current risk-free rate is the same as you have applied previously.
How much is this project worth without the real option? How much is this option worth?
Real Option
• Determine the value of project without real option?
• Determine the value of real option?
Managerial economics applications strategy and tactics
ISBN: 978-1439079232
12th Edition
Authors: James r. mcguigan, R. Charles Moyer, frederick h. deb harris