Three potential paths with equal probability

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Reference no: EM131949896

Book: An applied course in real options valuation; Shockley.

The price of a unit to be manufactured can follow one of three potential paths with equal probability:

Path Period 0 Period 1 Period 2

A $35 $40 $45

B $35 $40 $40

C $35 $35 $35

D $35 $30 $25

A) What is NPA of a project that will allow the firm to manufacture 200 units each year for periods 1 and 2, assuming a cost of $12,800 and a discount rate of 10%?

B) Assuming that half the cost ($6,400) can be spent now and the rest after period 1, what is the NPV?

C) Suppose that after period 1 the price is $35 or $30, then what is the NPV of investing the second half of the $12,800?

D) Suppose that after period 1 the price is $40, then what is the NPV of investing the second half of the $12,000? is the 10$ discount rate appropriate here?

Reference no: EM131949896

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