Assume a company runs a plant for which the value one year from now is either $1,000
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Assume a company runs a plant for which the value one year from now is either $1,000 if market growth is positive or $250 if market growth is negative. The probability of positive market growth is 60%, and the probability is 40% for negative market growth. At any time, the company can choose to close the plant and collect the scrap value of $285 if scrapped today or $300 if scrapped in one year. The cost of capital for the plant is 10% and the risk-free rate is 5%. Estimate the value of the plant using the standard NPV, decision tree analysis (DTA), and real-option valuation (ROV) valuation models. Explain the differences in results.
Cost Of CapitalCost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...
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Valuation Measuring and managing the values of companies
ISBN: ?978-0470424704
5th edition
Authors: Mckinsey, Tim Koller, Marc Goedhart, David Wessel
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