Real Options and Other Topics in Capital Budgeting参考.ppt

* * * * * * * * * ? 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part. ? 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part. ? 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part. Real Options and Other Topics in Capital Budgeting Identifying Embedded Options Valuing Real Options in Projects Chapter 13 13-* What is real option analysis? Real options exist when managers can influence the size and riskiness of a project’s cash flows by taking different actions during or at the end of a project’s life. Real option analysis incorporates typical NPV capital budgeting analysis with an analysis of opportunities resulting from managers’ responses to changing circumstances that can influence a project’s outcome. 13-* What are some examples of real options? Growth/expansion options Abandonment/shutdown options Investment timing options Flexibility options 13-* Investment Timing Option Project X has an up-front cost of $100,000. The project is expected to produce cash flows of $33,500 at the end of each of the next four years (t = 1, 2, 3, and 4). The project has a WACC = 10%. The project’s NPV is $6,190. Therefore, it appears that the company should go ahead with the project. However, if the company waits a year they will find out more information about market conditions and the impact on the project’s expected cash flows. 13-* Investment Timing Option If they wait a year: There is a 50% chance the market will be strong and the expected cash flows will be $43,500 a year for four years. There is a 50% chance the market will be weak and the expected cash flows will be $23,500 a year for four years. The project’s initial cost will remain $100,000, but it will be incurred at t