Valuing Real Options Data: Real Option Data WACC: Probability Cash Flow Risk-free rute = 309% Initial cost of project= 570 45% 530 Project life (years) 3 25% $10 Proceed with Project Today without real option Future Cash Flows NPV of this Probability Now: Year 0 Year 1 Year 2 Year 3 Scenario Probability INPV High $50 $50 1.30 -570 Average 530 $30 0.45 Low $10 0.25 1.00 Expected value of NPVs = Decision Tree Analysis: Timing Option: Implement in One Year Only if High Future Cash Flows NPV of this Probability Now: Year 0 Year 1 Year 2 Year 3 Year 4 Scenario Probability I NPV High 50 0.30 Wait 50 3.45 Low 0.25 Expected PV of Future CF: = Future Cost of Implementation Cost (Discount at Risk-Free Rate) NPV of this Now: Year 0 Year 1 Year 2 Year 3 Year 4 Scenario Probability INPV High 0.30 Average 0.45 Low 0.25 Expected PV of Future CEs = Expected value of NPVs = Growth Option Growth OPTION:Replicate the original project Only if demand is High after it ends in 3 yea Operating Future Cash Flows NPV of this Now: Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Scenario