What is the value of the growth option

Reference no: EM131994917

Question: Martin Development Co. is deciding whether to proceed with Project X. The cost would be $11 million in Year 0. There is a 50% chance that X would be hugely successful and would generate annual after-tax cash flows of $7 million per year during Years 1, 2, and 3. However, there is a 50% chance that X would be less successful and would generate only $1 million per year for the 3 years. If Project X is hugely successful, it would open the door to another investment, Project Y, which would require an outlay of $13 million at the end of Year 2. Project Y would then be sold to another company at a price of $26 million at the end of Year 3. Martin's WACC is 14%.

a) If the company does not consider real options, what is Project X's expected NPV?

b) What is X's expected NPV with the growth option?

c) What is the value of the growth option?

Reference no: EM131994917

Questions Cloud

Properties of least square estimator for linear regression : a) What are important principles of least square estimation for the linear regression

Do you think the given is fair to the home owne : In Massachusetts, insurance companies have the right to decline renewal of a home owner's house insurance if that home owner submits three claims.

What is the bond current yield : A bond that matures in 8 years sells for $960. The bond has a face value of $1,000 and a 9 percent annual coupon. What is the bond's current yield?

Durbin-watson statistic : Suppose we have the Durbin-Watson statistic is equal to 3.0 from the regression residual, Does this result indicate that error terms are independent?

What is the value of the growth option : Martin Development Co. is deciding whether to proceed with Project X. The cost would be $11 million in Year 0. There is a 50% chance that X would be hugely.

Budgeted amount will be exceeded in a given week : How much should be budgeted for weekly repairs, cleaning and maintenance so that the probability that the budgeted amount will be exceeded in a given week

What is the dollar amount of prepayment : What is the dollar amount of prepayment in month 26 and the starting pool balance for month 27 of this security

Determining health of a company from perspective of investor : Markets can be wildly unpredictable with respect to their statement of a company's value. In other words, a company's stock might be very low but in reality.

What is the most appropriate test for the given claim : What is the most appropriate test for the given claim? What formula to use? What is the null hypothesis and alternative hypothesis?

User Account

All Pages