Some questions may require you to use financial calculator or Excel. (In the final exam, for students without financial calculator, writing down the formula will be enough. However, those formulas must be correct to get full credit. Therefore, it is a good practice to check whether you are correct by using Excel for these practice questions)

1. How are real options different from financial options?

2. Consider the following project data:

(1)A $500 feasibility study will be conducted at t = 0. (2)If the study indicates potential, the firm will spend $1,000 at t = 1 to build a prototype. The best estimate now is that there is an 80 percent chance that the study will indicate potential, and a 20 percent chance that it will not. (3)If reaction to the prototype is good, the firm will spend $10,000 to build a production plant at t = 2. The best estimate now is that there is a 60 percent chance that the reaction to the prototype will be good, and a 40 percent chance that it will be poor. (4)If the plant is built, there is a 50 percent chance of a t = 3 cash inflow of $16,000 and a 50 percent chance of a $13,000 cash inflow.

If the appropriate cost of capital is 10 percent, what is the project's expected NPV?

Answer : $35

To find the NPV of the first outcome:
NPV = -$500 - 1000/1.1 - 1000/(1.1)^2 + 16000/(1.1)^3 = $2,347.48 The other NPVs can be found similarly.
E(NPV) = 0.24($2,347) + 0.24($94) + 0.32(-$1,409) + 0.20(-$500) = $35. (The following information applies to the next two problems.)

3. Diplomat.com is considering a project that has an up-front cost of $3 million and produces an expected cash flow of $500,000 at the end of each of the next five years. The project’s cost of capital is 10 percent.

Based on this information what is the project’s net present value?

...St. Petersburg State University
Graduate School of Management
Master in Corporate Finance
Value creation at Consol Energy: a realoption approach
Fedorov Roman
Lebedev Dmitry
Remezova Anna
Rusanov Valeriy
Ulyasheva Stella
Instructor: Alexandr V. Bukhvalov
St. Petersburg
2013
Table of Contents
Introduction 3
1. Company’s background and market overview 4
2.1. Energy production market in the USA4
2.2. Overview of Consol...

...Laura Martin: RealOptions and the Cable Industry
Introduction
Laura Martin, an equity research analyst for cable stocks, believes that the best way to value cable stocks is through creative methods such as realoptions and not through more traditional or typical valuation methods such as EBITDA multiples, ROIC analysis and DCF analysis. In 1999 she presented at the Credit Suisse First Boston Broadband conference, where she wanted...

...Introduction:
Realoption analysis (ROA) is a decision-making structure that basically calculates the value of a future business decision. ROA borrows from financial options theory. A financial option gives the buyer of a financial asset the right, but not the obligation, to buy a stock or bond, for example, at a predetermined price at a future date. By analogy, a realoption is a managerial decision-making...

...A09-05-0018
Eskandar Tooma
Aliaa I. Bassiouny
Valuation of an Increased Capacity
Project Using RealOption Analysis:
The Case of Savola Sime Egypt
“Our profits almost doubled last financial year; however, I don’t think we can expect the same increase
this year,” said Karim Reda, production manager for Savola Sime Egypt, in September 1997. “We
simply don’t have the capacity to produce more.” He was speaking to Mohamed Sallam, CFO of Savola.
Over the past month,...

...org/journal/ib)
RealOptions Literature Review*
Shihong Zeng, Shuai Zhang
Finance Department of Economics Management School, Beijing University of Technology, Beijing, China Email: zengshihong2000@yahoo.com.cn Received October 19th, 2010; revised November 19th, accepted 26th, 2010.
ABSTRACT
After 30 years of discussion and research, the academic community has established a complete theoretical system of realoptions and provided...

...RealOptions in Telecommunication
Network Evolution Economics
John M. Charnes∗
The University of Kansas
School of Business—FEDS
1300 Sunnyside Avenue
Lawrence, KS 66045
jmc@ku.edu
Barry R. Cobb
The University of Kansas
School of Business—FEDS
1300 Sunnyside Avenue
Lawrence, KS 66045
brcobb@ku.edu
January 19, 2003
1
Introduction
This document describes ongoing work to be performed on a research project
during the period 16 September 2002...

...he realoption approach to investment decision making
The realoption approach to investment decision making does not provide a superior alternative to traditional methods
Capital investment decisions are among the most important strategic decisions a company can make. Twenty years ago, managers began to realise that the traditional capital spending decision techniques such as discounting cash flow (DCF) were based on estimated...

...Advanced Corporate Finance and Modeling – FINA0065-1
Assignment #1 – Laura Martin: RealOptions and the Cable Industry
1. Consider the multiples analysis developed in Exhibits 2,5 & 6
Please describe the method of ‘Multiples’ using case numbers and answer to the following
questions:
1.1. What assumptions does this analysis rely upon?
1.2. How is Martin’s regression analysis different from/similar to traditional multiples analysis?
1.3. Do you agree with...