PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Chapter 22, Problem 10PS
Summary Introduction
To discuss: The appropriate option according to the given statement.
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The owner of a small printing company is considering the purchase of additional printing equipment to expand her business. If the owner expands the business and sales are high, projected profits (minus the cost of the equipment) should be $90,000; if sales are low, projected profits should be $40,000. If the equipment is not purchased, projected profits should be $70,000 if sales are high and $50,000 if sales are low.
Consider Decision Tree Analysis
Are there options other than the purchase of additional equipment that should be considered in making the decision to expand the business?
The equipment to be purchased is known in the industry to have a useful life of five years. How might this impact the printing company?
Real Options—the Option to Abandon a Project You and several of your classmates havejust graduated from college and are evaluating various investment opportunities, including a startupcompany that would produce high-quality jackets embroidered with a college logo. If demand forthis customized product is high, you expect to sell approximately 100,000 units per year, at a priceper unit of $80. On the other hand, because of stiff competition in the field, a pessimistic estimateis that demand for your new product would be only 40,000 units per year at a selling price of$70. Anticipated variable costs per jacket amount to $40. Capacity-related (i.e., short-term fixed)costs other than the cost of manufacturing equipment are thought to be negligible. Manufacturingequipment (with a 10-year life, a cost of $12 million, and a zero salvage value) would have to bepurchased as part of this project. Assume that, for income tax purposes, your company will usestraight-line depreciation over the life…
The owner of a small printing company is considering the purchase of additional printing equipment to expand her business. If the owner expands the business and sales are high, projected profits (minus the cost of the equipment) should be $90,000; if sales are low, projected profits should be $40,000. If the equipment is not purchased, projected profits should be $70,000 if sales are high and $50,000 if sales are low.
Consider Decision Tree Analysis
If the owner is optimistic about the company's future sales, should the company expand by purchasing the equipment?
Is the owner's optimism or pessimism about sales the only factor that may impact the company's profits?
Chapter 22 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 22 - Real options Respond to the following comments. a....Ch. 22 - Prob. 2PSCh. 22 - Real options True or false? a. Real-options...Ch. 22 - Prob. 4PSCh. 22 - Real options Describe each of the following...Ch. 22 - Expansion options Look again at the valuation in...Ch. 22 - Expansion options Look again at Table 22.2. How...Ch. 22 - Prob. 8PSCh. 22 - Timing options Look back at the Malted Herring...Ch. 22 - Prob. 10PS
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