Exam 22: Real Options

Assume that Kinston has the ability to ignore the pilot production and test marketing and to go ahead and build their manufacturing plant immediately and that the probability of high or low demand would still be 50%.What is the value of the the option to do pilot production and test marketing?

DM Skateboard company is planning to develop a new electric skateboard.In order for the project to be successful,the company must develop a new deck to accommodate a lightweight battery,a lightweight battery,and a remote that is easy to operate while moving in an open environment.The company estimates the following costs,times,and probabilities of success for each component of the new skateboard: All three risks are idiosyncratic and the risk-free rate of interest is 5%.The company does not have the resources to develop all the components at the same time.Therefore,management needs to decide in what order to develop the technologies. -What is the failure cost index of the deck technology?

Assume that Kinston has the ability to ignore the pilot production and test marketing and to go ahead and build their manufacturing plant immediately.Further assume that the probability of high or low demand is still 50%.Draw a decision tree that details Kinston Industries Mountain Bike project if Kinston goes ahead and builds the plant immediately.

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Assuming that Kinston does not have the ability to sell the prototype in year one for $300,000,the NPV of the Kinston Industries Mountain Bike Project is closest to:

Assuming that this project will provide Rearden with perpetual annual cash flows of $65,000,the NPV of investing in the project today using the hurdle rate is closest to:

Assume DM Skateboard Company has estimated that,if all stages are successful,the present value of all future profits will be $4 million.If DM does the three stages in the correct order,what is the NPV of the project?

Assume that you are not able to sell the plant,but you are able to shut down the plant at no cost at any time.Given the embedded option to abandon production the value of your plant will be closest to:

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Assuming that this project will provide Rearden with perpetual annual cash flows of $45,000,Rearden should:

Use the information for the question(s)below. Kinston Industries has come up with a new mountain bike prototype and is ready to go ahead with pilot production and test marketing.The pilot production and test marketing phase will last for one year and cost $500,000.Your management team believes that there is a 50% chance that the test marketing will be successful and that there will be sufficient demand for the new mountain bike.If the test-marketing phase is successful,then Kinston Industries will invest $3 million in year one to build a plant that will generate expected annual after tax cash flows of $400,000 in perpetuity beginning in year two.If the test marketing is not successful,Kinston can still go ahead and build the new plant,but the expected annual after tax cash flows would be only $200,000 in perpetuity beginning in year two.Kinston has the option to stop the project at any time and sell the prototype mountain bike to an overseas competitor for $300,000.Kinston's cost of capital is 10%. -Assuming that Kinston has the ability to sell the prototype in year one for $300,000,the NPV of the Kinston Industries Mountain Bike Project is closest to:

Which of the following statements is FALSE?

Assuming that this project will provide Rearden with perpetual annual cash flows of $80,000,the NPV of investing in the project today using the hurdle rate is closest to:

Assuming that this project will provide Rearden with perpetual annual cash flows of $55,000,the NPV of investing in the project today using the hurdle rate is closest to:

Using the equivalent annual benefit method,which project would you select and why?

The equivalent annual benefit of project A is closest to:

What is the failure cost index of the battery technology?

What is the failure cost index of the remote technology?