1. You have been asked to graphically illustrate a specific real option by drawing its profit diagram. It relates to a zipper machine that is used to sew zips into pairs of jeans. The zipper machine would ordinarily only cost $50,000 to purchase - but you were concerned what might happen if the market for jeans suddenly increased in popularity so you entered into an agreement with the machine manufacturer whereby you would pay $5,000 more for the machine up-front in return for them providing a machine to you that you could at any time spend $20,000 and immediately increase its' level of productivity.
2. Currently, the present value of the incremental future cash flows associated with increasing the production of jeans is $40,000.
3. Draw the profit diagram for the option described above. Label all axes, intercepts and turning points. Also indicate on the diagram with the letter "C" what current market conditions indicate about what the current profit and "moneyness" of the option described above.

10. You have been asked to graphically illustrate a specic real option by drawing its prot diagram. It relates to a zipper machine that is used to sew zips into pairs of jeans. The zipper machine would ordinarily only cost $50,000 to purchase but you were concerned what might happen if the market for jeans suddenly increased in popularity so you entered into an agreement with the machine manufacturer whereby you would pay $5,000 more for the machine upfront in return for them providing a machine to you that you could at any time spend $20,000 and immediately increase its' level of productivity. Currently, the present value of the incremental lture cash ows associated with increasing the production of jeans is $40,000. Draw the prot diagram for the option described above. Label all axes, intercepts and turning points. Also indicate on the diagram with the letter \"C\" what current market conditions indicate about what the current prot and \"moneyness\" of the option described above