WEEK 4 - OPTION TO INVEST

1 Suppose that the (gross) value of expected future cash inflows (V) may fluctuate in line with the rando

k 16% What is the static NPV of this project?

r 2%

upward ratio 1.4

downward ratio 0.7
p 0.457

Year CF Discounted CF
0 -20 -20.00
R&D
1 -100 -98.04
2 -1600 -1,537.87
3 400 256.26
4 800 441.83 Comercialization
5 1200 571.34
6 300 123.13

Static value -263.35

Expanded value -36.63

PV of Inflows 1,392.56
Pv of all Outflows -1,655.91

Evolution of Inflows
during R&D phase 2,729.43
Year2 Up-Up
1,949.59
Year1 Upward
1,392.56 1,364.71
Now Year2 Up-Down or Down-Up
974.79
Year1 Downward
682.36
Year2 Down-Down

Resulting CashFlow
of Comercialization
phase at present 1,129.43
Year2 Up-Up
506.03
Year1 Upward
226.72 0.00
Now Year2 Up-Down or Down-Up
0.00
Year1 Downward
0.00
Year2 Down-Down
uctuate in line with the random fluctuation in demand (u = 1.4, d = 0.7 per period). Also assume a risk-neutral probability of p = 0.457.

We only apply as an investment the costs of year 2 (1.600) because we are analysing the viability of Comercialization phase.
The previous costs are "R&D Expenditure"
PV of R&D Expenditure
-118.04
Value Program 108.68
The profits of the business taking into account the probabilities of bigger and lower gains

Expanded Value = Static Value + Option Value

108,68 = -263,35 + Option Value
Option Value 372.03
al probability of p = 0.457.

of Comercialization phase.
WEEK 4 - OPTION TO INVEST
1 Suppose that the (gross) value of expected future cash inflows (V) may fluctuate in line with the rando

k 16% What is the static NPV of this project?

r 2%

upward ratio 1.4

downward ratio 0.71428571
p 0.457

Year CF Discounted CF
0 -20 -20.00
R&D
1 -100 -98.04
2 -1600 -1,537.87
3 400 256.26
4 800 441.83 Comercialization
5 1200 571.34
6 300 123.13

Static value -263.35

Expanded value -36.63

PV of Inflows 1,392.56
Pv of all Outflows -1,655.91

Evolution of Inflows
during R&D phase 2,729.43
Year2 Up-Up
1,949.59
Year1 Upward
1,392.56 1,392.56
Now Year2 Up-Down or Down-Up
994.69
Year1 Downward
710.49
Year2 Down-Down

Resulting CashFlow
of Comercialization
phase at present 1,129.43
Year2 Up-Up
506.03
Year1 Upward
226.72 0.00
Now Year2 Up-Down or Down-Up
0.00
Year1 Downward
0.00
Year2 Down-Down
uctuate in line with the random fluctuation in demand (u = 1.4, d = 0.7 per period). Also assume a risk-neutral probability of p = 0.457.

We only apply as an investment the costs of year 2 (1.600) because we are analysing the viability of Comercialization phase.
The previous costs are "R&D Expenditure"
PV of R&D Expenditure
-118.04
Value Program 108.68
The profits of the business taking into account the probabilities of bigger and lower gains

Expanded Value = Static Value + Option Value

108,68 = -263,35 + Option Value
Option Value 372.03
al probability of p = 0.457.

of Comercialization phase.