Exam 16: Real Options

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 you are able to sell the plant,draw a decision tree detailing this problem.

Mortgage interest rates ________ Government of Canada bond rates because mortgages have ________ that the bonds do not have.

Use the information for the question(s) below. You own a small manufacturing plant that currently generates revenues of $2 million per year. Next year, based upon a decision on a long-term government contract, your revenues will either increase by 20% or decrease by 25%, with equal probability, and stay at that level as long as you operate the plant. Other costs run $1.6 million dollars per year. You can sell the plant at any time to a large conglomerate for $5 million and your cost of capital is 10%. -If you are not awarded the government contract and your sales decrease by 25%,then the value of your plant will be closest to:

One of the major differences between a real option and a financial option is that

Use the table for the question(s) below. Consider the following mutually exclusive projects: -The NPV of project A is closest to:

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:

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.

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 will cost $500,000. The 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 does not have the ability to sell the prototype in year one for $300,000,draw a decision tree detailing the Kinston Industries Mountain Bike Project.

The profitability index rule of thumb raises the bar on the NPV to take into account the option to ________.

Which of the following statements is false?

Use the table for the question(s) below. Consider the following mutually exclusive projects: -The NPV of project B is closest to:

Which of the following statements is false?

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 will cost $500,000. The 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:

An abandonment option is the option to walk away.Abandonment options can ________ a project because a firm can drop a project if it turns out to be unsuccessful.

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.Draw a decision tree detailing this problem.

Which of the following statements is false?