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Category > Business & Finance Posted 19 May 2017 My Price 11.00

Your firm is thinking of expanding

  1. Your firm is thinking of expanding. If you invest today, the expansion will generate $10 million in FCF at the end of the year, and will have a continuation value of either $150 million (if the economy improves) or $50 million (if the economy does not improve). If you wait until next year to invest, you will lose the opportunity to make $10 million in FCF, but you will know the continuation value of the investment in the following year (that is, in a year from now, you will know what the investment continuation value will be in the following year). Suppose the risk- free rate is 5%, and the risk-neutral probability that the economy improves is 45%. Assume the cost of expanding is the same this year or next year.

    1. If the cost of expanding is $80 million, should you do so today or wait until next year to

 

decide?

    1. At what cost of expanding would there be no difference between expanding now and wait- ing? To what profitability index does this correspond?

 

 

 

 

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Homework Helper
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Status NEW Posted 19 May 2017 01:05 PM My Price 11.00

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