Question: Skyfall, a global security company, is considering building a new plant (Plant 1) to take advantage of innovations in surveillance technology. In about three years
Skyfall, a global security company, is considering building a new plant (Plant 1) to take advantage of innovations in surveillance technology. In about three years the plant capacity may be expanded to allow Skyfalls entry into a new market (Plant 2). The cost of capital for this project is 12%. The long-term growth rate of the cash flows of the project is 5%. The standard deviation of the project value is 40% and the risk-free rate is 5.5% per year. What is the value of this option to expand?
|
| 2020 | 2021 | 2022 | 2023 | 2024 | 2025 | 2026 |
| Plant 1 |
|
|
|
|
|
|
|
| EBIT*(1-t) |
| 2.2 | 4 | 5 | 7 | 7.6 | 8.5 |
| Depreciation |
| 19 | 21 | 21 | 22 | 22.5 | 22.5 |
| Capex | 120 | 8.1 | 9.5 | 10 | 11.4 | 12 | 12 |
| NWC | 25 | 4.1 | 5.5 | 5 | 6 | 6 | 6.3 |
|
|
|
|
|
|
|
|
|
| Plant 2 |
|
|
|
|
|
|
|
| EBIT*(1-t) |
|
|
|
| 4.5 | 6.1 | 8.9 |
| Depreciation |
|
|
|
| 24.3 | 25.6 | 27.5 |
| Capex |
|
|
| 307 | 4.6 | 4.3 | 5 |
| NWC |
|
|
| 75 | 1.1 | 2 | 3.4 |
Step by Step Solution
There are 3 Steps involved in it
Get step-by-step solutions from verified subject matter experts