Suppose Dave Marberger, the CFO of Godiva Chocolatier, has just completed an evaluation of a proposed capital expenditure for the expansion of the firm’s chocolate factory in Brussels. Using the traditional NPV methodology, he has found the project unacceptable because 

NPV_traditional = -€10,000,000 < €0 

Before recommending rejection of the expansion project, he has decided to assess whether real options might be embedded in the firm’s cash flows. His evaluation uncovered three options:

Option 1: Abandonment. The project could be abandoned at the end of 3 years, resulting in an addition to NPV of €15,000,000.

Option 2: Growth. If the project outcomes occurred, an opportunity to expand the firm’s product offerings further would become available at the end of 4 years.

Exercise of this option is estimated to add €25,000,000 to the project’s NPV.

Option 3: Timing. Certain phases of the proposed expansion project could be delayed if market and competitive conditions caused the firm’s forecast revenues to develop more slowly than planned. Such a delay in implementation at that point has an NPV of €100,000,000.

Dave estimated that there was a 25% chance that the abandonment option would need to be exercised, a 40% chance that the growth option would be exercised, and only a 5% chance that the implementation of certain phases of the project would affect timing.

a. Use the information provided to calculate the strategic NPV, NPVstrategic, for Godiva’s proposed expansion.

b. On the basis of your findings in part a, what action should Dave recommend to management with regard to the proposed expansion?

c. In general, how does this problem demonstrate the importance of considering real options when making capital budgeting decisions?