A Company has 8 million Kg of Coppar. Mining will include 1.25 million Rs. Of cost for one year of development immidietely. Extraction Cost 0.85 Rs. At beginning of extraction phase. (One year after development phase is initiated). Sale of coppar would be at spot price as of coppar as of beginning of extraction phase.Current Spot Price 0.95 per Kg. Change in the price of coppar is 7% and Standard Deviation is 20% per annum.Required Rate of return is 10% and riskless rate is 5%.

NPV AnalysisInitial Cost -1.25Quantity 8 million KgS0 0.95 per KGPrice change 7%Required Rate of Return 10%Extraction Cost 0.85 per KG

OutPut data

1.018883

Outflow -1.25Inflow 1.228238Expected NPV -0.02176

Decision

Project is Rejected Because of Negative Expected NPV

Expected Price of Coppar in 1 year S1

A Company has 8 million Kg of Coppar. Mining will include 1.25 million Rs. Of cost for one year of development immidietely. Extraction Cost 0.85 Rs. At beginning of extraction phase. (One year after development phase is initiated). Sale of coppar would be at spot price as of coppar as of beginning of extraction phase.Current Spot Price 0.95 per Kg. Change in the price of coppar is 7% and Standard Deviation is 20% per annum.

Black-Scholes Model:

Input DataStock Price now (P) 7.6Exercise Price of Option (EX) 6.8Number of periods to Exercise in years (t) 1Compounded Risk-Free Interest Rate (rf) 5.00%Standard Deviation (annualized s) 20.00%

Output DataPresent Value of Exercise Price (PV(EX)) 6.4684

s*t^.5 0.2000d1 0.9061d2 0.7061Delta N(d1) Normal Cumulative Density Function 0.8176Bank Loan N(d2)*PV(EX) 4.9156

Value of Call 1.2979

Value of Put 0.1663

DecisionOption Adjusted Present value 0.0479Accept Project because of Positive Expected NPV

A Company has 8 million Kg of Coppar. Mining will include 1.25 million Rs. Of cost for one year of development immidietely. Extraction Cost 0.85 Rs. At beginning of extraction phase. (One year after development phase is initiated). Sale of coppar would be at spot price as of coppar as of beginning of extraction phase.

,=K*e^(-rt)

,=Std. * t^1/2

A Company has 8 million Kg of Coppar. Mining will include 1.25 million Rs. Of cost for one year of development immidietely.

A Company has 8 million Kg of Coppar. Mining will include 1.25 million Rs. Of cost for one year of development immidietely.

A Company has 8 million Kg of Coppar. Mining will include 1.25 million Rs. Of cost for one year of development immidietely.

A Company has 8 million Kg of Coppar. Mining will include 1.25 million Rs. Of cost for one year of development immidietely.

A Company has 8 million Kg of Coppar. Mining will include 1.25 million Rs. Of cost for one year of development immidietely.

A Company has 8 million Kg of Coppar. Mining will include 1.25 million Rs. Of cost for one year of development immidietely.

A Company has 8 million Kg of Coppar. Mining will include 1.25 million Rs. Of cost for one year of development immidietely.

A Company has 8 million Kg of Coppar. Mining will include 1.25 million Rs. Of cost for one year of development immidietely.

A Company has 8 million Kg of Coppar. Mining will include 1.25 million Rs. Of cost for one year of development immidietely.

A Company has 8 million Kg of Coppar. Mining will include 1.25 million Rs. Of cost for one year of development immidietely.

A Company has 8 million Kg of Coppar. Mining will include 1.25 million Rs. Of cost for one year of development immidietely.

A Company has 8 million Kg of Coppar. Mining will include 1.25 million Rs. Of cost for one year of development immidietely.

A Company has 8 million Kg of Coppar. Mining will include 1.25 million Rs. Of cost for one year of development immidietely.

A Company has 8 million Kg of Coppar. Mining will include 1.25 million Rs. Of cost for one year of development immidietely.

A Company has 8 million Kg of Coppar. Mining will include 1.25 million Rs. Of cost for one year of development immidietely.

A Company has 8 million Kg of Coppar. Mining will include 1.25 million Rs. Of cost for one year of development immidietely.

A Company has 8 million Kg of Coppar. Mining will include 1.25 million Rs. Of cost for one year of development immidietely.

A Company has 8 million Kg of Coppar. Mining will include 1.25 million Rs. Of cost for one year of development immidietely.

A Company has 8 million Kg of Coppar. Mining will include 1.25 million Rs. Of cost for one year of development immidietely.

A Company has 8 million Kg of Coppar. Mining will include 1.25 million Rs. Of cost for one year of development immidietely.

A Company has 8 million Kg of Coppar. Mining will include 1.25 million Rs. Of cost for one year of development immidietely.

A Company has 8 million Kg of Coppar. Mining will include 1.25 million Rs. Of cost for one year of development immidietely.

A Company has 8 million Kg of Coppar. Mining will include 1.25 million Rs. Of cost for one year of development immidietely.

A Company has 8 million Kg of Coppar. Mining will include 1.25 million Rs. Of cost for one year of development immidietely.

A Company has 8 million Kg of Coppar. Mining will include 1.25 million Rs. Of cost for one year of development immidietely.

A Company has 8 million Kg of Coppar. Mining will include 1.25 million Rs. Of cost for one year of development immidietely.

A Company has 8 million Kg of Coppar. Mining will include 1.25 million Rs. Of cost for one year of development immidietely.

You are examining the financial viability of investing in some abandoned copper mines in Chile, which still have significant copper deposits in them. A geologist survey suggests that there might be 10 million pounds of copper in the mines still and that the cost of opening up the mines will be $3 million (in present value dollars). The capacity output rate is 400,000 pounds a year and the price of copper is expected to increase 4% a year. The Chilean Government is willing to grant a twenty-five year lease on the mine. The average production cost is expected to be 40 cents a pound and the current price per pound of copper is 85 cents. (The production cost is expected to grow 3% a

NPV AnalysisInitial Cost 0Quantity 400000 million KgS0 0.85 per KGPrice change 4%years 25.00Risk Free 7%Production Cost 0.4 per KGProduction Cost Change 3%

OutPut dataPresent Values of Inflows 3309755.06Outflow 3000000

Expected NPV 309755.06

DecisionOption Adjusted Present value 828674.0148

year, once initiated.) The annualized standard deviation in copper prices is 25% and the twenty-five year bond rate is 7%. a. Estimate the value of the mine using traditional capital budgeting techniques. b. Estimate the value of the mine based upon an option pricing model. c. How would you explain the difference between the two values?

Project should be delayed because call value is greater then present NPV

You are examining the financial viability of investing in some abandoned copper mines in Chile, which still have significant copper deposits in them. A geologist survey suggests that there might be 10 million pounds of copper in the mines still and that the cost of opening up the mines will be $3 million (in present value dollars). The capacity output rate is 400,000 pounds a year and the price of copper is expected to increase 4% a year. The Chilean Government is willing to grant a twenty-five year lease on the mine. The average production cost is expected to be 40 cents a pound and the current price per pound of copper is 85 cents. (The production cost is expected to grow 3% a

Black-Scholes Model:

Input DataStock Price now (P)Exercise Price of Option (EX)Number of periods to Exercise in years (t)Compounded Risk-Free Interest Rate (rf)VarianceStandard Deviation (annualized s)Annualized dividend yield

Output DataPresent Value of Exercise Price (PV(EX))s*t^.5d1d2Delta N(d1) Normal Cumulative Density FunctionN(d2)Bank Loan N(d2)*PV(EX)Delta N(-d1) Normal Cumulative Density Function

N(-d2)

Value of Call

Value of Put

year, once initiated.) The annualized standard deviation in copper prices is 25% and the twenty-five year bond rate is 7%. a. Estimate the value of the mine using traditional capital budgeting techniques. b. Estimate the value of the mine based upon an option pricing model. c. How would you explain the difference between the two values?

You are examining the financial viability of investing in some abandoned copper mines in Chile, which still have significant copper deposits in them. A geologist survey suggests that there might be 10 million pounds of copper in the mines still and that the cost of opening up the mines will be $3 million (in present value dollars). The capacity output rate is 400,000 pounds a year and the price of copper is expected to increase 4% a year. The Chilean Government is willing to grant a twenty-five year lease on the mine. The average production cost is expected to be 40 cents a pound and the current price per pound of copper is 85 cents. (The production cost is expected to grow 3% a

33097563000000

257.00%0.04%

25.00%4.00%

521321.8304 ,=K*e^(-rt)

1.2500 ,=Std. * t^1/2

1.30360.0536

Delta N(d1) Normal Cumulative Density Function 0.90380.5214

271805.1880Delta N(-d1) Normal Cumulative Density Function 0.0962

0.4786

828674.0148

132404.6575

year, once initiated.) The annualized standard deviation in copper prices is 25% and the twenty-five year bond rate is 7%. a. Estimate the value of the mine using traditional capital

NPV AnalysisInitial Cost -750Projected Cashflow 85Percentage 12%Year 10.00

OutPut data

Inflow 480.27₹

Outflow -750

Expected NPV -269.73₹

DecisionOption Adjusted Present value 477.2832

Accept Project because of Positive Expansion call value

Reliable Machinery Inc. is considering expanding its operations in Thailand. The initial analysis of the projects yields the following results.· The project is expected to generate $85 million in after-tax cash flows every year for the next 10 years. The initial investment in the project is expected to be $750 million. The cost of capital for the project is 12%.If the project generates much higher cash flows than anticipated, you will have the exclusive right for the next 10 years (from a manufacturing license) to expand operations into the rest of South East Asia. A current analysis suggests the following about the expansion opportunity.The expansion will cost $2 billion (in current dollars).The expansion is expected to generate $150 million in after tax cash flows each year for 15 years. There is substantial uncertainty about these cash flows and the standard deviation in the present value is 40%. The cost of capital for this investment is expected to be 12% as well. The riskfree rate is 6.5%. a. Estimate the net present value of the initial investment.b. Estimate the value of the expansion option.

Reliable Machinery Inc. is considering expanding its operations in Thailand. The initial analysis of the projects yields the following results.· The project is expected to generate $85 million in after-tax cash flows every year for the next 10 years. The initial investment in the project is expected to be $750 million. The cost of capital for the project is 12%.If the project generates much higher cash flows than anticipated, you will have the exclusive right for the next 10 years (from a manufacturing license) to expand operations into the rest of South East Asia. A current analysis suggests the following about the expansion opportunity.The expansion will cost $2 billion (in current dollars).The expansion is expected to generate $150 million in after tax cash flows each year for 15 years. There is substantial uncertainty about these cash flows and the standard deviation in the present value is 40%. The cost of capital for this investment is expected to be 12% as well. The riskfree rate is 6.5%. a. Estimate the net present value of the initial investment.

Black-Scholes Model:

Input Data 0.316228Stock Price now (P) 1021.63Exercise Price of Option (EX) 2000Number of periods to Exercise in years (t) 10Compounded Risk-Free Interest Rate (rf) 6.50%variance 0.00%Standard Deviation (annualized s) 40.00%Cost of delay 0.00%

Output DataPresent Value of Exercise Price (PV(EX)) 1044.0916 ,=K*e^(-rt)

s*t^.5 1.2649 ,=Std. * t^1/2

d1 0.6153d2 -0.6496Delta N(d1) Normal Cumulative Density Function 0.7308N(d2) 0.2580Bank Loan N(d2)*PV(EX) 269.3334Delta N(-d1) Normal Cumulative Density Function 0.2692

N(-d2) 0.7420

Value of Call 477.2832

Value of Put 499.7448

Reliable Machinery Inc. is considering expanding its operations in Thailand. The initial analysis of the projects yields the following results.· The project is expected to generate $85 million in after-tax cash flows every year for the next 10 years. The initial investment in the project is expected to be $750 million. The cost of capital for the project is 12%.If the project generates much higher cash flows than anticipated, you will have the exclusive right for the next 10 years (from a manufacturing license) to expand operations into the rest of South East Asia. A current analysis suggests the

The expansion is expected to generate $150 million in after tax cash flows each year for 15 years. There is substantial uncertainty about these cash flows and the standard deviation in the present value is 40%. The cost of capital for