When should company-specific risks not to be reflected

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Reference no: EM131359583

Suppose we can create two products: A and B; A and B are mutually exclusive to each other. The price of both products is $4 in real terms. The Sales Volume for product A is 5 million units yearly, and for product B is 10 million yearly. In real terms per unit, for product A would be $1.5 and for product B would be $1.70. Assume inflation rates here is 5%. Further, suppose product A need investments of $10.2 million and product B needs investment of $ 12 million. Both products A and B are depreciated straight-line down to zero in 3 years,the product B line will have a $ 1000 in real terms after year 3. The real discount rate is 13% and the corporate tax rate is 34%.

Question

1) Which product is financially preferable? Shall calculation to support.

2) Please give a case-related example of both sunk and opportunity costs.

3) When should company-specific risks not to be reflected in the discount rate applied.

4) Please give three relevant examples of real options that can be applicable here.

Reference no: EM131359583

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