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  • 12A Real Option Examples

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    XY Chan
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    1) This document analyzes the net present value (NPV) of different investment options over multiple time periods and scenarios. 2) The first option considers postponing an investment with an expected NPV of $107 if postponed to year 1 and $117 if invested in year 1. 3) The second option considers a growth option with an expected stage 1 NPV of -$166 if not exercised, and an overall expected NPV of $142 if the growth option is exercised over two stages.

    Original Description:

    Real options FIN 3300

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    1) This document analyzes the net present value (NPV) of different investment options over multiple time periods and scenarios. 2) The first option considers postponing an investment with an expected NPV of $107 if postponed to year 1 and $117 if invested in year 1. 3) The second option considers a growth option with an expected stage 1 NPV of -$166 if not exercised, and an overall expected NPV of $142 if the growth option is exercised over two stages.

    Copyright:

    © All Rights Reserved
    Download as XLSX, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    2 views3 pages

    12A Real Option Examples

    Uploaded by

    XY Chan
    1) This document analyzes the net present value (NPV) of different investment options over multiple time periods and scenarios. 2) The first option considers postponing an investment with an expected NPV of $107 if postponed to year 1 and $117 if invested in year 1. 3) The second option considers a growth option with an expected stage 1 NPV of -$166 if not exercised, and an overall expected NPV of $142 if the growth option is exercised over two stages.

    Copyright:

    © All Rights Reserved
    Download as XLSX, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    of 3

    1) POSTPONEMENT OPTION

    i) Without Postponement
    NPV
    Prob
    388.4297521
    41.32231405
    -132.231405

    yr 0
    0.25
    0.5
    0.25

    -1000
    -1000
    -1000

    Expected NPV (at year 0) =


    84.7107438017

    2) GROWTH OPTION
    i) Stage 1
    NPV
    Prob
    666,666.67
    ###

    yr 0
    0.50
    (1,000,000.00)
    0.50
    (1,000,000.00)

    Expected NPV (stage 1, no growth option) =


    (166,666.67)

    ii) Overall
    NPV
    Prob
    2,827,160.49
    (259,259.26)
    (1,000,000.00)
    Expected NPV =
    141,975.31

    yr 0
    yr1
    0.25
    (1,000,000.00)
    0.25
    (1,000,000.00)
    0.50
    (1,000,000.00)

    800,000.00
    800,000.00
    -

    yr 1

    yr 2
    800
    600
    500

    800
    600
    500

    ii) Postponed
    NPV
    Prob
    $388.43
    $41.32
    $0.00

    0.25
    0.5
    0.25

    Expected NPV (at year 1) =


    $117.77
    Expected NPV (at year 0) =
    $107.06

    yr1
    1,800,000.00
    -

    ii) Stage 2
    NPV (yr0)
    Prob
    2,160,493.83
    (925,925.93)
    -

    0.25
    0.25
    0.50

    Expected NPV (stage 2, yr 0) =


    308,641.98

    yr2
    3,600,000.00
    -

    Expected NPV (stage 1, no growth option) + Ex


    -166666.666667 +

    yr 0

    yr 1

    yr 2
    -1000
    -1000
    0

    yr1

    yr 3
    800
    600
    0

    yr2
    (1,000,000.00)
    (1,000,000.00)
    -

    3,600,000.00
    ###

    , no growth option) + Expected NPV (stage 2, yr 0) =


    308,641.98 =
    141,975.31

    800
    600
    0

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