EBK CORPORATE FINANCE
4th Edition
ISBN: 9780134202785
Author: DeMarzo
Publisher: VST
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Question
Chapter 22, Problem 7P
Summary Introduction
To determine: Whether vacation should be taken today or should wait.
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It is the beginning of September and you have been offered the following deal to go heli-skiing. If you pick the first week in January and pay for your vacation now, you can get a week of heli-skiing for $3,000. However, if you cannot ski because the helicopters cannot fly due to
bad weather, there is no snow, or you get sick, you do not get a refund. There is a 40% probability that you will not be able to ski. If you wait until the last minute and go only if you know that the conditions are perfect and you are well, the vacation will cost you $5,500. You estimate
that the pleasure you get from heli-skiing is worth $7,600 per week to you (if you had to pay more than that, you would choose not to go). If your cost of capital is 17% per year, should you book ahead or wait?
You should
because the NPV of this choice is $
(Round to two decimal places.)
book ahead
wait
It is the beginning of September and you have been offered the following deal to go heli-skiing. If you pick the first week in January and pay for your vacation now, you
can get a week of heli-skiing for $1,500. However, if you cannot ski because the helicopters cannot fly due to bad weather, there is no snow, or you get sick, you do
not get a refund. There is a 45% probability that you will not be able to ski. If you wait until the last minute and go only if you know that the conditions are perfect and
you are well, the vacation will cost you $4,800. You estimate that the pleasure you get from heli-skiing is worth $7,100 per week to you (if you had to pay more than
that, you would choose not to go). If your cost of capital is 13% per year, should you book ahead or wait?
You should
because the NPV of this choice is $
(Round to two decimal places.)
A used car that currently costs $25,000 will have a market value of $8,000 in four years. As a student, you cannot afford to pay
$25,000, but you want to have a car while you are going to university for the next four years. Your father agrees to lend you
$25,000 on the condition that you pay him $300 at the end of every month for the next four years and $25,000 at the end of the
four years. The car dealer provides financing facilities, and you are qualified to get a lease for which you will have to make
monthly, end-of-month payments of $650 for 48 months. Which option will leave you better off, assuming your opportunity cost is
6 percent?
Chapter 22 Solutions
EBK CORPORATE FINANCE
Ch. 22.1 - What is the difference between a real option and a...Ch. 22.1 - Why does a real option add value to an investment...Ch. 22.2 - Prob. 1CCCh. 22.2 - In what circumstances does the real option add...Ch. 22.2 - How do you use a decision tree to make the best...Ch. 22.3 - What is the economic trade-off between investing...Ch. 22.3 - Prob. 2CCCh. 22.3 - Does an option to invest have the same beta as the...Ch. 22.4 - Why can a firm with no ongoing projects, and...Ch. 22.4 - Why is it sometimes optimal to invest in stages?
Ch. 22.4 - How can an abandonment option add value to a...Ch. 22.5 - Prob. 1CCCh. 22.5 - Prob. 2CCCh. 22.6 - Why can staging investment decisions add value?Ch. 22.6 - How can you decide the order of investment in a...Ch. 22.7 - Prob. 1CCCh. 22.7 - Prob. 2CCCh. 22 - Your company is planning on opening an office in...Ch. 22 - You are trying to decide whether to make an...Ch. 22 - Prob. 4PCh. 22 - Prob. 5PCh. 22 - You are a financial analyst at Global Conglomerate...Ch. 22 - Prob. 7PCh. 22 - Prob. 8PCh. 22 - Consider again the electric car dealership in...Ch. 22 - Prob. 12PCh. 22 - Prob. 13PCh. 22 - You are an analyst working for Goldman Sachs, and...Ch. 22 - You own a small networking startup. You have just...Ch. 22 - An original silver dollar from the late eighteenth...Ch. 22 - What implicit assumption is made when managers use...Ch. 22 - Prob. 22PCh. 22 - Genenco is developing a new drug that will slow...Ch. 22 - Prob. 24PCh. 22 - Your firm is thinking of expanding. If you invest...Ch. 22 - Prob. 26PCh. 22 - Assume that the project in Example 22.5 pays an...
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