306 words - 2 pages

For the question one, we have the income statement for the Penelope. We need to find the FCF to calculate the NPV for the project, FCF=EBIT –TAX+ Depreciation-capital spending- change in NWC. In order to find the PV of project, we need to calculate the cost of capital. We use the asset beta 1.2, Risk free rate(10%), market premium(4%). Then the cost of capital is equal to 14.8%. Then we discount the ...view middle of the document...

For the question two, we need to find out the expect value of the second generation. Before start the second generation, we need to make the first generation first. The cost for the first generation is 10 million dollars, we can identify the cost as the exercise price. The present value first generation FCF(2002-2006) is $6,629,929. This is the stock price so far. The volatility per period is 50%, the number of period is 4 years. We use the Black-Scholes Model to calculate the Call value. The call price is 66,988.02$. That is the expect value of the second-generation.

For the question three, we use the existed data (risk free rate, project value, volatility and cost of capital) to draw the binomial tree for the expect value of the project for next two years. The project could be sell for 4 million dollars in second year if the demand is not high. The 4 million dollars minus the value of project in second year, then we get the possible values of abandonment in second years. Then we use the binomial method to calculate the value of put in year 2, the value of put is $357,287.65.

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