Explanation Figure 1 illustrates the cash flow value for the different tiem period. . Table 1 shows the income statement and cash flow statement for the research phase. Values are given in million. Depreciation is obtained by dividing the investment with the year. Taxable income is obtained by subtracting the total cost (Employment, OH and MKT, material and depreciation) from total revenue. Income tax is obtained by multiplying the tax rate with the taxable income. Net income is obtained by subtract the income tax from the taxable income. Net cash flow is obtained by adding the depreciation with net income. Present worth (PW) is obtained by multiplying the present worth factor ( 1 ( 1 + i ) n ) with respective year cash flow. Table 1 0 1 2 3 4 Total Revenue 0 0 0 0 Employment 0.8 0.8 0.8 0.8 OH and MKT 0.16 0.16 0.16 0.16 Material 0.5 0.4 0.4 0.4 Depreciation 0.75 0.75 0.75 0.75 Taxable income -2.21 -2.11 -2.11 -2.11 Income tax .884 0.844 0.844 0.844 Net income -1.326 1.266 -1.266 -1.266 Investment -3 Net cash flow -3 -0.576 -0.516 -0.516 -0.516 PW -3 -0.5143 -0.4114 -0.3673 -0.3279 -4.621 The investment worth for the research phase is 4.621 million. Table 2 shows the income statement and cash flow statement for the development phase that calculated by following the procedure done in Table 1. Table 2 4 5 6 7 8 Total Revenue 0 0 0 0 Employment 0.32 0.32 0.32 0.32 OH and MKT 1 1 1 1 Material 0.35 0.35 0.35 0.35 Depreciation -0.5 -0.5 -0.5 -0.5 Taxable income -2.17 -2.17 -2.17 -2.17 Income tax -0.868 -0.868 -0.868 -0.868 Net income -1.302 -1.302 -1.302 -1.302 Investment 0.5 0.5 0.5 0.5 Net cash flow -2 -0.802 -0.802 -0.802 -0.802 PW -2 -0.7161 -0.6393 -0.5708 -0.5097 -4.436 The investment worth for the development phase is 4.436 million. Table 3 shows the income statement and cash flow statement for the manufacturing phase that calculated by following the procedure done in Table 1. Table 3 8 9 10 11 12 13 14 15 16 17 18 Revenue 50 50 50 50 50 50 50 50 50 50 Employment 1 1 1 1 1 1 1 1 1 1 OH and MKT 18 12 12 12 12 12 12 12 12 12 Material Depreciation 10 10 10 10 10 10 10 10 10 10 Taxable income 21 27 27 27 27 27 27 27 27 27 Income tax 8

Calculate the option value.

Contemporary Engineering Economics (6th Edition)

6th Edition

ISBN: 9780134105598

Author: Chan S. Park

Publisher: PEARSON

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Chapter 13, Problem 4ST

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