Compute the difference between these two values

Reference no: EM131414109

The XYZ firm can invest in a new DRAM chip factory for $425 million. The factory, which must be invested in today, has cash flows two years from now that depend on the state of the economy. The cash flows when the factory is running at full capacity are described by the following tree diagram:

In year 1, the firm has the option of running the plant at less than full capacity. In this case, workers are laid off, production of memory chips is scaled down, and the subsequent cash flows are half of what they would be when the plant is running at full capacity. An alternative use for the firm's funds is investment in the market portfolio. In the states that correspond to the branches of the tree above, $1 invested in the market portfolio grows as follows:

Assume that the risk-free rate is 5 percent per year, compounded annually. Compute the project's present value

(a) with the option to scale down and

(b) without the option to scale down. Compute the difference between these two values, which is the value of the option.

Reference no: EM131414109

Questions Cloud

What is the price/earnings ratio of the merged firm : If Maytag accounts for 60 percent of the earnings of the merged firm, and if there are no synergies between the two merged firms, what is the price/earnings ratio of the merged firm?

What is the role of psychologist in helping to stem the tide : The times in which we live have often been referred to as the "Age of Anxiety" for many reasons. In fact, depression and anxiety are the most commonly diagnosed mental disorders. That being said, what are the political and social factors that give..

Main points or idea of the article : Write-up 2 paragraphs about this article: The first paragraph is the summary in which you describe what the article is about. Use your own words to explain the main points or idea of the article.

Kenyan government embarked on a keynesian : 1. In the 1950s, facing massive unemployment in the cities (much of it disguised in the informal sector), the Kenyan government embarked on a "Keynesian" policy of creating new urban jobs through public investment.

Compute the difference between these two values : In year 1, the firm has the option of running the plant at less than full capacity.

Identify pertinent information from a first-time patient : For this Discussion Board, address the following: Identify pertinent information from a first-time patient, including demographic and insurance information. Discuss the consequences of not obtaining the correct information

What competitors are charging for the same service : What ABC will charge for services and what competitors are charging for the same service. Under Janitorial and commercial elaborate on bidding strategy and software for bidding etc.

Why hollywood was reluctant to add sound : Discuss (3) reasons why Hollywood was reluctant to add sound to their films and List and Define (2) early technological or artistic advances that helped movie studios make better quality sound films.

What are social determinants of health : What are social determinants of health? How do social determinants of health contribute to the development of illness? What is a communicable disease chain

User Account

All Pages