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Real options and the strategic NPV Jenny Rene, the CFO of Asor Products, Inc., has just completed an evaluation of a proposed capital expenditure for equipment that would expand the firm's manufacturing capacity. Using the traditional NPV methodology, she found the project unacceptable because: raditional-$1,674 o Before recommending rejection of the proposed project, she has decided to assess whether real options might be embedded in the firm's cash flows. Her evaluation uncovered three options and their probability: Option 1: Abandonment -The project could be abandoned at the end of 3 years, resulting in an addition to NPV of $1,250 Option 2: Growth-If the projected 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 $2,920 to the project's NPV. Option 3: Timing Certain phases of the proposed 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 $10,000. Jenny estimated at there was a 25% chance at he abandonment op n wou dne to be exercised, a 3 chance at he growth option wou bee ercise and on a % chance at he mplementation o e an ases e o would affect timing. a. Use the information provided to calculate the strategic NPV, NPVstrategie for Asor Products' proposed equipment expenditure b. On the basis of your findings in part (a), what action should Jenny recommend to management with regard to the proposed equipment expenditure? c. In general, how does this problem demonstrate the importance of considering real options when making capital budgeting decisions? a. The value of the real options is $ 2,189. (Round to the nearest dollar.) The strategic NPV is $515.(Round to the nearest dollar.) b. Judging from your findings in part (a), what action should Jenny recommend to management with regard to the proposed equipment expenditure? Accept the project. (Select from the drop-down menu.) c. In general, how does this problem demonstrate the importance of considering real options when making capital budgeting decisions? (Select the best answer below.) c. In general, how does this problem demonstrate the importance of considering real options when making capital budgeting decisions? (Select the best answer below.) No. Projects should be evaluated based on their NPV without considering embedded options. A. Yes. Embedded options are used to calculate the NPV traditional. B. Xc. No. Embedded options are hard-to-quantify and usually strategic in nature so including them is not worth the effort D. Yes. Embedded options could cause an otherwise unacceptable project to become acceptable Real o tions and he strategic NPV Jenny Rene the CFO of Asor Products NPV methodology, she found the project unacceptable because: has us completed an evaluation of a proposed capital e enditure or e u pment hat would expand the snthe n m s manu a um capa . aditional NPV traditional -$2,194