Calculate the value of the real option

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Reference no: EM13529100

Marcal Corporation is considering foreign direct investment in Asia. The company estimates that the project would require an initial investment of $18 million. and generate positive cash flows of $3 million a year at the end of each of the next 20 years. The project's cost of capital is 13%.

a. Calculate the project's NPV.

b. The company thinks there is a 50-50 chance that the Asian country will impose restrictions on the company in one year. If the restrictions are imposed, cash flows will be $2,000,000 per year for 20 years. If restrictions are not imposed, cash flows will be $4,000,000 per year for 20 years. Cost of capital remains the same. In either case, the cost will remain at $18,000,000 and cost of capital at 13%. Calculate the value of the real option by waiting one year to decide.

c. Apart from real options, discuss 3 qualitative factors that the company should consider when making its decision on accepting the new project.

Reference no: EM13529100

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