FIN 486 Expect Success/uophelp.com FIN 486 Expect Success/uophelp.com | Page 32

Option 2: Growth. If the projected outcomes occurred, an opportunity
to expand the firm’s product offerings further would become available
at the end of 4 years. Exercise of this option is estimated to add
$3,000 to the project’s NPV.
Option 3: Timing. Certain phases of the proposed project could be
delayed if market and competitive conditions caused the firm’s
forecast revenues to develop more slowly than planned. Such a delay
in implementation at that point has an NPV of $10,000.
Jenny estimated that there was a 25% chance that the abandonment
option would need to be exercised, a 30% chance that the growth
option would be exercised, and only a 10% chance that the
implementation of certain phases of the project would affect timing.
a.Use the information provided to calculate the strategic NPV,
NPVstrategic, for Asor Products’ proposed equipment expenditure.
b.Judging on the basis of your findings in part a, what action should
Jenny recommend to management with regard to the proposed
equipment expenditure?
c.In general, how does this problem demonstrate the importance of
considering real options when making capital budgeting decisions?
P12–19
Capital rationing: NPV approach A firm with a 13% cost of capital
must select the optimal group of projects from those shown in the
following table, given its capital budget of $1 million.
LG 6
a.Calculate the present value of cash inflows associated with each
project.
b.Select the optimal group of projects, keeping in mind that unused
funds are costly.

=========================================

FIN 486 Week 4 Individual Assignment Capital Budgeting
Scenarios