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.

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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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Students have asked these similar questions

Compute the value of a real option using the following information: PV(project cash flows) = 51.6, NPV(project cash flows) = 1.6, Project upfront cost = 50, Risk-free rate = 4%, NPV volatility = 45.9%, Years to expiration = 1, d1 = 0.0674, d2 = -0.3795, N(d1) = 0.5269, N(d2) = 0.3522, el-04"1) – 0.960789 Round your answer to two decimal places, e.g. 92.993 --> 92.99, 92.987 --> 92.99

3 9. The historical returns for two investments-A and B-are summarized in the following table for the period 2016 to 2020, Use the data to answer the questions that follow. a. On the basis of a review of the return data, which investment appears to be more risky? Why? b. Calculate the standard deviation for each investment's returns. c. On the basis of your calculations in part b, which investment is more risky? Compare this conclusion to your observation in part a. Review Only Click the icon to see the Worked Solution. a. On the basis of a review of the return data, which investment appears to be more risky? Why? (Choose the best answer below.) O A. The riskier investment appears to be investment B, with returns that vary widely from the average relative to investment A, whose returns show less deviation from the average. O B. Investment A and investment B have equal risk because the average returns are the same. O C. The riskier investment appears to be investment A, with returns…

When specifying the minimum attractive rate of return (MARR): a. Use the value 10%, as it is an easy multiple to work with b. Exercise caution in calculating it, as once it is defined, you can use it indefinitely for all future investments c. Ensure that it reflects the opportunity cost associated with investing in the candidate alternative as opposed to investing in other available alternatives d. Calculate the weighted average cost of capital(WACC) to establish the upper bound on the MARR.

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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Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

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.

Answer 20

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 21

c.

Expert Solution

Answer 22

c.

Expert Solution

Answer 23

Expert Solution

Answer 24

Summary Introduction

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

Answer 25

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 26

Ch. 22 - Expansion options Look again at the valuation in...Ch. 22 - Prob. 2PS Ch. 22 - Prob. 3PS Ch. 22 - Prob. 4PS Ch. 22 - Prob. 5PS Ch. 22 - Prob. 6PS Ch. 22 - Real options True or false? a. Real-options...Ch. 22 - Prob. 8PS Ch. 22 - Prob. 9PS Ch. 22 - Expansion options Look again at Table 22.2. How...

Solution Summary: The author enumerates the reasons for the changes if there is an increase in uncertainty.

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