Question: Evaluate the real options for the given projects. Project Initial Investment Cash Flow Year 1 Cash Flow Year 2 Cash Flow Year 3 Option to

Evaluate the real options for the given projects.

Project

Initial Investment

Cash Flow Year 1

Cash Flow Year 2

Cash Flow Year 3

Option to Expand (Year 2)

W

$200,000

$50,000

$70,000

$90,000

$150,000 investment for $300,000 return

X

$250,000

$60,000

$80,000

$100,000

$200,000 investment for $400,000 return

What is the value of the option to expand for Project W? 

What is the value of the option to expand for Project X? 

Requirement: Evaluate the real options under different conditions.

What is the value of the option to expand for Project W if the return on expansion is reduced to $250,000? 

What is the value of the option to expand for Project X if the investment required for expansion increases to $250,000?

 

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