Go over figures 13.1 to 13.4 in your textbook and be familiar with the following computations: Expected NPV, std. dev., CV and value of the option.

Notes:

1. I am referring to the figures embedded in the narrative of the chapter and not the end of chapter problems.

2. I will post an Announcement showing all the computations for figure 13.1. You may omit that figure, but you need to show the computations for parts I, II and III in figures 13.2, 13.3 and 13.4.

Just to get the ball rolling, I am providing the step by step calculations for figure 13.1. You can omit this figure in your HW submission, but you need to show the step by step calculations, for parts I, II and III, for the remaining figures 13.2, 13.3 and 13.4.

Part I: Project without the Growth Option:

NPV (Good): You can use row 2 of the calculator with the following inputs:

CF0 = -3000; C01 = 1500; F01 = 3; I = 12; CPT NPV; NPV = $603

Note: If you don't feel comfortable using the frequency key, you can enter the cash flows as follows:

CF0 = -3000; C01 = 1500; F01 = 1; C02 = 1500; F02 = 1; C03 = 1500; F03 =1

You follow the same procedure for the bad outcome and you get NPV = -$358

Expected NPV:

(.5*603) + (.5*(-358)) = $122

Standard Deviation:

SQRT[..5(603-122)^2 + .5(-358-122)^2] = $480

CV:

480/122 = 3.93

Part II: Project with the Option

The calculations are identical to part I. When you follow the calculations noted above, you get the following numbers:

Expected NPV = $1,503

Std. Dev. = $1,861

CV = 1.24

Part III: Value of the Option

Value of the option is the expected NPV with the option – expected NPV without the option. In this case:

Value of the option = $1,503 – $122 = $1,381

Notes:

1. If expected NPV without the option is negative, the project would not be accepted and so the option has no value.

2. Although the concepts in the four figures are fundamentally different, the calculations are identical.