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Problem - Determine the value of the option for the Bayer Company by delaying its investment for one year. Consider the value of the option is the difference between traditional present value analysis and real option analysis. The initial investment is for $700,000, but the investment will not be made until next year. The investment is being delayed so that Bayer's management can better determine the market for its product. There are two alternatives for sales in the next year of $1,000,000 or $800,000. Each sales level has an occurrence probability of 50%. The cost of capital for Bayer is 8%. If traditional present value analysis shows that the net present value of the project is $75,000, what is the value of the option (the ability to wait one year before executing or abandoning the project)?
In order to complete this assignment, refer to the scenario from Assignment 1, as well as to the scenarios and readings from previous weeks.
As his appointment time approaches, you prepare a short explanation of the way that capital gains taxes may be hurting his net returns and the difference between short-term gains and long-term gains.
What is the estimated present value of the future obligation
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