Explanation Table that shows future cash flows of the optimal decision is as follows: 0 1 2 3 4 5 6 High -$75 $45 $45 $45-$70 $45 $45 $45 Average -$75 $30 $30 $30 $0 $0 $0 Low -$75 $15 $15 $15 $0 $0 $0 Table (1) Formula to calculate NPV in case of high demand is as follows: NPV = − $ 75 + $ 45 ( 1 + 10 % ) + $ 45 ( 1 + 10 % ) 2 + $ 45 ( 1 + 10 % ) 3 + $ 45 ( 1 + 10 % ) 4 + $ 45 ( 1 + 10 % ) 5 + $ 45 ( 1 + 10 % ) 6 − $ 75 ( 1 + 6 % ) 3 = $ 58

Estimate: The value of the option with growth option using decision-tree analysis.

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Estimate: The value of the option with growth option using decision-tree analysis.

Solution Summary: The author estimates the value of the option with growth option using decision-tree analysis. The formula to calculate NPV in case of high demand is as follows:

Estimate: The value of the option with growth option using decision-tree analysis.

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Chapter 26 Solutions