Motorcars Inc. Atlanta is trying to Open a car dealership, it will cost them $5 million...

 

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Motorcars Inc. Atlanta is trying to Open a car dealership, it will cost them $5 million to open the dealership, whether Motorcars Inc. open it now or in one year. If Motorcars Inc. open the dealership immediately, they expect it to generate $600,000 in free cash flow the first year. While future cash flows will vary with consumer tastes and the state of the economy, on average these cash flows are expected to grow at a rate of 2% per year. The appropriate cost of capital for this investment is 12% Find the value of the Project. You have given the flexibility That you can delay opening for one year. Upfront Investment Required Final Decision Date Risk-Free Rate $5 million 1 year 5% Volatility of Asset Value FCF Lost from Delay Compute the value of Call Option Now that You have find the current estimate of the electric car dealership's value is $6 million. What would be the value of the dealership contract if the volatility of the dealership's value were 25% rather than 40%? Alternatively, suppose the volatility is 40%, but waiting would lead competitors to expand and reduce the future free cash flows of the dealership by 10%. What is the value of the contract in this case? 40% $0.6 million Motorcars Inc. Atlanta is trying to Open a car dealership, it will cost them $5 million to open the dealership, whether Motorcars Inc. open it now or in one year. If Motorcars Inc. open the dealership immediately, they expect it to generate $600,000 in free cash flow the first year. While future cash flows will vary with consumer tastes and the state of the economy, on average these cash flows are expected to grow at a rate of 2% per year. The appropriate cost of capital for this investment is 12% Find the value of the Project. You have given the flexibility That you can delay opening for one year. Upfront Investment Required Final Decision Date Risk-Free Rate $5 million 1 year 5% Volatility of Asset Value FCF Lost from Delay Compute the value of Call Option Now that You have find the current estimate of the electric car dealership's value is $6 million. What would be the value of the dealership contract if the volatility of the dealership's value were 25% rather than 40%? Alternatively, suppose the volatility is 40%, but waiting would lead competitors to expand and reduce the future free cash flows of the dealership by 10%. What is the value of the contract in this case? 40% $0.6 million

Answer rating: 100% (QA)

i Value of the Project Cash flow Cost growth rate 600000 12 2 6000000 ii Value of call Option d1 lnS... View the full answer