I need the calculations on how to solve this!

This is an example of the calculations needed:

Part I: Project without the Growth Option:

NPV (Good): You can use row 2 of the calculator with the following inputs:

CF0 = -3000; C01 = 1500; F01 = 3; I = 12; CPT NPV; NPV = $603

Note: If you don't feel comfortable using the frequency key, you can enter the cash flows as follows:

CF0 = -3000; C01 = 1500; F01 = 1; C02 = 1500; F02 = 1; C03 = 1500; F03 =1

You follow the same procedure for the bad outcome and you get NPV = -$358

Expected NPV:

(.5*603) + (.5*(-358)) = $122

Standard Deviation:

SQRT[..5(603-122)^2 + .5(-358-122)^2] = $480

CV:

480/122 = 3.93

Part II: Project with the Option

The calculations are identical to part I. When you follow the calculations noted above, you get the following numbers:

Expected NPV = $1,503

Std. Dev. = $1,861

CV = 1.24

Part III: Value of the Option

Value of the option is the expected NPV with the option - expected NPV without the option. In this case:

Value of the option = $1,503 - $122 = $1,381

Chapter 13 Real Options and Other Topics in Capital Budgeting FIGURE 13. 2 Analysis of an Abandonment Option (dollars in thousands) 3 Part I. Cannot Abandon Cash Flow at End of Period NPV @ 5 Outcome 6| Best Case 25% 71 Base Case 50% 81 Worst Case 25% $1,000 -$1,000 -51.000 $1,300$1,348 $298 -$280 -$1,888 $14 Standard Deviation (o) $1,179 83.25 $800 $400 $500 S280-$280-$280 $400 $200 $600 $600 Expected NPV Coefficient of Variation CV /Expected NPV 13 Part II. Can Abandon NPV @ 10% Cash Flow at End of Period 15 Outcome 16 Best Case 171 Base Case 1, Worst #1 Prob 25% 50% 0% 25% -$1,000 -$1,000 $200 $1,000-$280 -$280 -$280 -$1,000 $280 $600 $400 $800 $500 1.300 $1,348 $298 $400 $600 -$28 -$1,888| Don't Use -$1,089 Use 19 Worst #2 $200 Expected NPV Standard Deviation (o) CV . / Expected NPV $214 $866 4.05 ztx1on 24 Part Ill. Value of the Optio Erpected NPV with the abandonment option Expected NPV without the abandonment option $214 27 CASE 1: If the expected NPV without the abandonment option is positive, then Expected NPV with Expected NPV without the abandonment Value of the Optionthe abandonment $200 CASE 2: If the expected NPV without the abandonment option is negative, then 30 Expected NPV with the abandonment Value of the Option Note: If a negative NPV project does not have an abandonment option, then it would not be undertaken. In these cases, the expected NPV without the abandonment option is zero. 35 VALUE OF OPTION $200 Chapter 13 Real Options and Other Topics in Capital Budgeting FIGURE 13. 2 Analysis of an Abandonment Option (dollars in thousands) 3 Part I. Cannot Abandon Cash Flow at End of Period NPV @ 5 Outcome 6| Best Case 25% 71 Base Case 50% 81 Worst Case 25% $1,000 -$1,000 -51.000 $1,300$1,348 $298 -$280 -$1,888 $14 Standard Deviation (o) $1,179 83.25 $800 $400 $500 S280-$280-$280 $400 $200 $600 $600 Expected NPV Coefficient of Variation CV /Expected NPV 13 Part II. Can Abandon NPV @ 10% Cash Flow at End of Period 15 Outcome 16 Best Case 171 Base Case 1, Worst #1 Prob 25% 50% 0% 25% -$1,000 -$1,000 $200 $1,000-$280 -$280 -$280 -$1,000 $280 $600 $400 $800 $500 1.300 $1,348 $298 $400 $600 -$28 -$1,888| Don't Use -$1,089 Use 19 Worst #2 $200 Expected NPV Standard Deviation (o) CV . / Expected NPV $214 $866 4.05 ztx1on 24 Part Ill. Value of the Optio Erpected NPV with the abandonment option Expected NPV without the abandonment option $214 27 CASE 1: If the expected NPV without the abandonment option is positive, then Expected NPV with Expected NPV without the abandonment Value of the Optionthe abandonment $200 CASE 2: If the expected NPV without the abandonment option is negative, then 30 Expected NPV with the abandonment Value of the Option Note: If a negative NPV project does not have an abandonment option, then it would not be undertaken. In these cases, the expected NPV without the abandonment option is zero. 35 VALUE OF OPTION $200