Book: An applied course in real options valuation; Shockley.
The price of a unit to be manufactured can follow one of three potential paths with equal probability:
Path Period 0 Period 1 Period 2
A $35 $40 $45
B $35 $40 $40
C $35 $35 $35
D $35 $30 $25
A) What is NPA of a project that will allow the firm to manufacture 200 units each year for periods 1 and 2, assuming a cost of $12,800 and a discount rate of 10%?
B) Assuming that half the cost ($6,400) can be spent now and the rest after period 1, what is the NPV?
C) Suppose that after period 1 the price is $35 or $30, then what is the NPV of investing the second half of the $12,800?
D) Suppose that after period 1 the price is $40, then what is the NPV of investing the second half of the $12,000? is the 10$ discount rate appropriate here?