Reference no: EM131924170

Real options and the strategic NPV Jenny? Rene, the CFO of Asor? Products, Inc., has just completed an evaluation of a proposed capital expenditure for equipment that would expand the? firm's manufacturing capacity. Using the traditional NPV? methodology, she found the project unacceptable? because: NPV Subscript traditional Baseline equals negative =−$1,809<0 Before recommending rejection of the proposed? project, she has decided to assess whether there might be real options embedded in the? firm's cash flows. Her evaluation uncovered three options and their? probability: Option? 1: Abandonment long dash —The project could be abandoned at the end of 3? years, resulting in an addition to NPV of $1,360. Option? 2: Growth long dash —If the projected outcomes? occurred, an opportunity to expand the? firm's product offerings further would occur at the end of 4 years. Exercise of this option is estimated to add $3,750 to the? project's NPV. Option? 3: Timing long dash —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 an NPV of $11,000. Jenny estimated that there was a 30% chance that the abandonment option would need to be? exercised, a 35% chance that the growth option would be? exercised, and only a 5% chance that the implementation of certain phases of the project would affect timing. a. Use the information provided to calculate the strategic? NPV, NPV Subscript strategic NPVstrategic?, for Asor? Products' proposed equipment expenditure. b. Judging on the basis your findings in part ?(a?), what action should Jenny recommend to management with regard to the proposed equipment? expenditure? c. In? general, how does this problem demonstrate the importance of considering real options when making capital budgeting? decisions? a. The value of the real options is ?$ nothing . ? (Round to the nearest? dollar.)