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Present value of future cash flows

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You have been asked to graphically illustrate a specific option to alter production by drawing its payoff diagram. It relates to an industrial beer fermenter that can also be adapted to be used to ferment wine if the company chooses to switch from beer to wine production. This specific fermenter cost $100,000 initially to buy, which was $30,000 more than a fermenter that could only ferment beer. If the firm chooses to switch production, it will cost the firm $60,000 to re-format the machine so that it is able to ferment wine.

Currently, the present value of the future cash flows associated with beer production is $450,000, while the present value of future cash flows associated with wine production is $410,000 (excluding any costs associated with reformatting the machine). Draw the profit diagram for the option described above. Label all axes, intercepts and turning points. Also indicate on the diagram with the letter "A" what current market conditions indicate about what the current profit and "moneyness" of the option described above.

Reference no: EM132742256

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