Expansion options * Look again at the valuation in Table 22.2 of the option to invest in the Mark II project. Consider a change in each of the following inputs. Would the change increase or decrease the value of the expansion option? a. Increased uncertainty (higher standard deviation). b. More optimistic forecast (higher expected value) of the Mark II in 1985. c. Increase in the required investment in 1985.

Question

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Answer 1

Textbook Question

Chapter 22, Problem 1PS

Expansion options* Look again at the valuation in Table 22.2 of the option to invest in the Mark II project. Consider a change in each of the following inputs. Would the change increase or decrease the value of the expansion option?

a. Increased uncertainty (higher standard deviation).
b. More optimistic forecast (higher expected value) of the Mark II in 1985.
c. Increase in the required investment in 1985.

a.

Expert Solution

Summary Introduction

To discuss: The changes if there is an increase in uncertainty.

Explanation of Solution

The reasons on the changes if there is an increase in uncertainty is as follows:

The worth of the expansion options increase if the uncertainty increases.

b.

Expert Solution

Summary Introduction

To discuss: The changes if there is more optimistic forecast.

Explanation of Solution

The reasons on the changes if there is more optimistic forecast is as follows:

The worth of the expansion options increases due to this the expected cash flows are higher. This caused due to the increase in the more optimistic forecast.

c.

Expert Solution

Summary Introduction

To discuss: The changes if there is an increase in required investment.

Explanation of Solution

The reasons on the changes if there is an increase in required investment is as follows:

The worth of the expansion options decrease if there is an increase in the required investment.

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Answer 2

Textbook Question

Chapter 22, Problem 1PS

Expansion options* Look again at the valuation in Table 22.2 of the option to invest in the Mark II project. Consider a change in each of the following inputs. Would the change increase or decrease the value of the expansion option?

a. Increased uncertainty (higher standard deviation).
b. More optimistic forecast (higher expected value) of the Mark II in 1985.
c. Increase in the required investment in 1985.

a.

Expert Solution

Summary Introduction

To discuss: The changes if there is an increase in uncertainty.

Explanation of Solution

The reasons on the changes if there is an increase in uncertainty is as follows:

The worth of the expansion options increase if the uncertainty increases.

b.

Expert Solution

Summary Introduction

To discuss: The changes if there is more optimistic forecast.

Explanation of Solution

The reasons on the changes if there is more optimistic forecast is as follows:

The worth of the expansion options increases due to this the expected cash flows are higher. This caused due to the increase in the more optimistic forecast.

c.

Expert Solution

Summary Introduction

To discuss: The changes if there is an increase in required investment.

Explanation of Solution

The reasons on the changes if there is an increase in required investment is as follows:

The worth of the expansion options decrease if there is an increase in the required investment.

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Answer 3

Textbook Question

Chapter 22, Problem 1PS

Expansion options* Look again at the valuation in Table 22.2 of the option to invest in the Mark II project. Consider a change in each of the following inputs. Would the change increase or decrease the value of the expansion option?

a. Increased uncertainty (higher standard deviation).
b. More optimistic forecast (higher expected value) of the Mark II in 1985.
c. Increase in the required investment in 1985.

a.

Expert Solution

Summary Introduction

To discuss: The changes if there is an increase in uncertainty.

Explanation of Solution

The reasons on the changes if there is an increase in uncertainty is as follows:

The worth of the expansion options increase if the uncertainty increases.

b.

Expert Solution

Summary Introduction

To discuss: The changes if there is more optimistic forecast.

Explanation of Solution

The reasons on the changes if there is more optimistic forecast is as follows:

The worth of the expansion options increases due to this the expected cash flows are higher. This caused due to the increase in the more optimistic forecast.

c.

Expert Solution

Summary Introduction

To discuss: The changes if there is an increase in required investment.

Explanation of Solution

The reasons on the changes if there is an increase in required investment is as follows:

The worth of the expansion options decrease if there is an increase in the required investment.

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Answer 4

Textbook Question

Chapter 22, Problem 1PS

Expansion options* Look again at the valuation in Table 22.2 of the option to invest in the Mark II project. Consider a change in each of the following inputs. Would the change increase or decrease the value of the expansion option?

a. Increased uncertainty (higher standard deviation).
b. More optimistic forecast (higher expected value) of the Mark II in 1985.
c. Increase in the required investment in 1985.

a.

Expert Solution

Summary Introduction

To discuss: The changes if there is an increase in uncertainty.

Explanation of Solution

The reasons on the changes if there is an increase in uncertainty is as follows:

The worth of the expansion options increase if the uncertainty increases.

b.

Expert Solution

Summary Introduction

To discuss: The changes if there is more optimistic forecast.

Explanation of Solution

The reasons on the changes if there is more optimistic forecast is as follows:

The worth of the expansion options increases due to this the expected cash flows are higher. This caused due to the increase in the more optimistic forecast.

c.

Expert Solution

Summary Introduction

To discuss: The changes if there is an increase in required investment.

Explanation of Solution

The reasons on the changes if there is an increase in required investment is as follows:

The worth of the expansion options decrease if there is an increase in the required investment.

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Answer 5

Textbook Question

Answer 6

Textbook Question

Answer 7

a.

Expert Solution

Summary Introduction

To discuss: The changes if there is an increase in uncertainty.

Explanation of Solution

The reasons on the changes if there is an increase in uncertainty is as follows:

The worth of the expansion options increase if the uncertainty increases.

b.

Expert Solution

Summary Introduction

To discuss: The changes if there is more optimistic forecast.

Explanation of Solution

The reasons on the changes if there is more optimistic forecast is as follows:

The worth of the expansion options increases due to this the expected cash flows are higher. This caused due to the increase in the more optimistic forecast.

c.

Expert Solution

Summary Introduction

To discuss: The changes if there is an increase in required investment.

Explanation of Solution

The reasons on the changes if there is an increase in required investment is as follows:

The worth of the expansion options decrease if there is an increase in the required investment.

Answer 8

a.

Expert Solution

Summary Introduction

To discuss: The changes if there is an increase in uncertainty.

Explanation of Solution

The reasons on the changes if there is an increase in uncertainty is as follows:

The worth of the expansion options increase if the uncertainty increases.

Answer 9

a.

Expert Solution

Answer 10

a.

Expert Solution

Answer 11

Expert Solution

Answer 12

Summary Introduction

To discuss: The changes if there is an increase in uncertainty.

Answer 13

Explanation of Solution

The reasons on the changes if there is an increase in uncertainty is as follows:

The worth of the expansion options increase if the uncertainty increases.

Answer 14

b.

Expert Solution

Summary Introduction

To discuss: The changes if there is more optimistic forecast.

Explanation of Solution

The reasons on the changes if there is more optimistic forecast is as follows:

The worth of the expansion options increases due to this the expected cash flows are higher. This caused due to the increase in the more optimistic forecast.

Answer 15

b.

Expert Solution

Answer 16

b.

Expert Solution

Answer 17

Expert Solution

Answer 18

Summary Introduction

To discuss: The changes if there is more optimistic forecast.

Answer 19

Explanation of Solution

The reasons on the changes if there is more optimistic forecast is as follows:

The worth of the expansion options increases due to this the expected cash flows are higher. This caused due to the increase in the more optimistic forecast.