+61-413 786 465

[email protected]

## Finance

 Basic Finance Corporate Finance Financial Management Financial Econometrics Portfolio Management Risk Management Public Finance Business Law & Ethics

Traditional project evaluation or capital budgeting analysis supposes a firm’s only choice is accept or refuse a program. In a real business situation, firms face lots of choices with respect to how to operate a project, both before it begins and after it is underway. Any time a firm has the ability to make choices, there is value added to the project in problem – Traditional NPV analysis ignores this value. The study of real options attempts to put up a dollar value on the ability to make choices.

a) What are real options and how are they valued.
b) Discuss the given:

Locate the given article:

IRREVERSIBILITY, UNCERTAINTY AND INVESTMENT:

(Robert S Pindyck – Massachusetts Institute of Technology March – 1990 – old but gold)

Most major investment expenditures have two important characteristics which together can dramatically affect the decision to invest. First, the expenses are largely irreversible; the firm can’t disinvest, thus the expenses must be viewed as sunk costs. Second, the investments can be delayed, giving the firm an opportunity to wait for new information regarding prices, costs and other market conditions before it commits resources.

c) Compute the given:

Pindyck supplies a simple two-period illustration to describe how irreversibility can affect an investment decision and how option pricing techniques can be employed to value a firm’s investment opportunity, and find out whether or not the firm should invest.

By using the given ex replicate Pyndick’s two-period illustration.

Consider a firm's decision to irreversibly invest in the widget factory. The factory can be built instantly, at a cost of \$7m, and will generate 1000 widgets per year forever, with zero operating cost. Presently the price of widgets is \$700, but next year the price will change. With probability .6 it will mount to \$800 and with probability (l-q) it will fall to \$600. The price will then remain at this new level forever. Suppose that this risk is fully diversifiable and hence the firm can discount future cash flows by using the risk-free rate, which we will take to be 10 percent.

Please mention all the references and sources for the assignment in haward style.

Financial Management, Finance

• Category:- Financial Management
• Reference No.:- M9499

Have any Question?

## Related Questions in Financial Management

### Financial management project -overview this assignment

Financial Management Project - Overview: This assignment consists of 2 questions covering Bond Valuation and Portfolio Analysis. Question 1: Bond Valuation Let's suppose today is 16/01/2018, and you are observing the inf ...

### Discussion as an initial response to the discussion topic

Discussion As an initial response to the discussion topic please create a Power Point presentation of 5 slides plus the title slide that contains the main results of part 2 of the Research Project. These slides should in ...

### Please respond to the following discussion not an essay

Please respond to the following: {Discussion, NOT an Essay. Under 350 WORDS} a) Propose three reforms to the investment markets that might reduce their exposure to systematic risk. Support your proposals with examples. b ...

### Company overviewintroductory paragraph summarize the

Company Overview Introductory paragraph. Summarize the section in 1 - 2 paragraphs including the history, current market, and the overall image of the organization. History Current Market Include a brief 2 - 3 paragraph ...

### Response 1 nancymergers or acquisitions m amp a - this

Response #1 (Nancy) Mergers or Acquisitions (M & A) - this publication: Mergers and acquisitions covers all aspects of mergers and acquisitions. Beginning with the pre-combination phase (the period between the deal's ann ...

### Consider two companies united states steel x and facebook

Consider two companies: United States Steel (X) and Facebook (FB). Look at the profiles (financial statements for 2016) of each on yahoo finance and discuss the followings (you need to calculate these values yourself and ...

### Questions 1 when can there arise a conflict between

Questions 1. When can there arise a conflict between shareholders and managers goals? How does wealth maximization goal take care of this conflict? 2. A company has just tested the market for a new product. The test indi ...

### Discuss the following questions professional or trade

Discuss the following Questions : Professional or trade organizations can provide ethical guidelines for business or professionals within their selected organization. Research a professional or trade organization. Provid ...

### Answer the following questions 1evaluate the criteria fel

Answer the following Questions : 1. Evaluate the criteria FEL uses to assign managers to project teams. What effi-ciencies do these criteria create? What are the resulting problems? 2. Why is it even more important that ...

### Nbspassignmentchapter 4 mini-case - samps air long term

Assignment Chapter 4 mini-case - S&S Air long term financial planning Note: data is based on the S&S Air financial statements S&S Air, INC. 2009 Income Statement Sales   \$30,499,420 Cost of goods sold   \$22,224,580 Other ...

• 4,153,160 Questions Asked
• 13,132 Experts
• 2,558,936 Questions Answered

## Looking for Assignment Help?

Start excelling in your Courses, Get help with Assignment

Write us your full requirement for evaluation and you will receive response within 20 minutes turnaround time.

Ask Now Help with Problems, Get a Best Answer

### Why might a bank avoid the use of interest rate swaps even

Why might a bank avoid the use of interest rate swaps, even when the institution is exposed to significant interest rate

### Describe the difference between zero coupon bonds and

Describe the difference between zero coupon bonds and coupon bonds. Under what conditions will a coupon bond sell at a p

### Compute the present value of an annuity of 880 per year

Compute the present value of an annuity of \$ 880 per year for 16 years, given a discount rate of 6 percent per annum. As

### Compute the present value of an 1150 payment made in ten

Compute the present value of an \$1,150 payment made in ten years when the discount rate is 12 percent. (Do not round int

### Compute the present value of an annuity of 699 per year

Compute the present value of an annuity of \$ 699 per year for 19 years, given a discount rate of 6 percent per annum. As