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Calculate the Present Value of the Project The prototypical relish in a real options analysis is to value the draw asset, that is, the project if it had no options attached. Usually this is done by discounted holding flow (DCF). In this case the chief source of doubt is the upcoming selling price of zircon subductors. Therefore Ms. east hemisphere starts by calculating the defend value of future revenues. She perceives no upward trend in subductor prices, and ends up soothsaying invariable prices for the next 8 years. Fixed costs are unvarying at $.7 million. The top panel of Figure 22.4 shows these cash-flow forecasts and calculates present set: about $13.8 million for revenues, after discounting at a risk-adjusted ordinate of 9%, and $4.3 million for fixed costs, after discounting at a risk-free rate of 6%.7 The NPV of the project, assuming no carry through value or abandonment everywhere its 10-year life, is: This NPV is slightly negative, merely Ms. e astern hemisphere has so furthermost made no planning for abandonment. Build a binomial Tree Now Ms. East constructs a binomial maneuver for revenues and PV(revenues).

She notes that subductor prices have followed a haphazard walk with an annual step deviation of about 20%. She constructs a binomial point with one step per year. The up values for revenues are 122% of the antecedent years revenues. The exhaust values are 82% of prior revenues.8 Thus, the up and down revenues for year 1 are $2.5 × 1.22 = $3.05 and $2.5 × .82 = $2.05 million, respectively. After subtraction of fixed costs, the up and down cash flows are $2.35 and $1.35 million, respectively. The first two yea rs of the resulting tree are shown below (fi! gures in millions of dollars).If you want to get a full essay, order it on our website: OrderEssay.net

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