EBK FOUNDATIONS OF FINANCE
EBK FOUNDATIONS OF FINANCE
10th Edition
ISBN: 9780135160473
Author: KEOWN
Publisher: PEARSON CO
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Chapter 11, Problem 17SP

(Real options and capital budgeting) Go-Power Batteries has developed a high-voltage nickel–metal hydride battery that can be used to power a hybrid automobile. It can sell the technology immediately to Toyota for $10 million, or alternatively, Go-Power Batteries can invest $50 million in a plant and produce the batteries for itself and sell them. Unfortunately, given the current size of the market for hybrids, the present value of the cash flows from such a plant would be only $40 million, implying that the plant has a negative expected NPV of –$10 million. What are the real options that are being ignored in this analysis? Can you come up with a compelling reason why Go-Power should keep the technology rather than sell it to Toyota?

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