Reference no: EM131010143

Jenny Rene, the CFO of Asor Products, Inc., has just completed an evaluation of a proposed capital expenditure for equipment that would expend the firm's manufacturing capacity. Using traditional NPV methodology, she found the project unacceptable because NPV traditional = -1,700<$0 Before recommending rejection of the proposed project, she has decided to assess whether or there might be real options embedded in the firm's cash flows. Her evaluation uncovered three options: Option 1 - Abandonment - The project could be abandoned at the end of 3 years, resulting in addition to NPV of $1,200 Option 2 - Growth - If the projected outcomes occurred, an opportunity to expend the firm's product offerings further would become available at the end of 4 years. Exercise of this option is estimated to add $3,000 to the project's NPV. Option 3 - Timing - Certain phases of the proposed project could be delayed if market and competitive conditions caused the firm's forecast revenues to develop more slowly than planned. Such a delay in implementation at that point has a NPV of $10,000 Jenny estimated that there was a 25% chance that the abandonment option would need to be exercised, a 30% chance that the growth option would be exercised, and only a 10% chance that the implementation of certain phases of the project would affect timing. a - Use the information provided to calculate the strategic NPV for Asoc Products' proposed equipment expenditure. b - Judging on the basis of your findings in part a, what action should Jenny recommend to management with regard to the proposed equipment expenditure? c- In general, how does this problem demonstrate the importance of considering real options when making capital budgeting decisions?