CFAI corp fin reading 28 Q18

set, additional, original, reading, average

it asks for optimal set of decisions, for me the original project should also be in the optimal set, i.e., use 40 to calculate
but why in the answer, it uses the possibility based average NPV for the original one and highest cash flow for additional one?
anyone has a clue?

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ramdabom

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2^#

发表于 2013-4-12 22:30 | 只看该作者

Since it is really asking what is the NPV if you do the expansion project, you have to get the NPV of the base case. Then you have to calculate the NPV starting on YR 1 for the expansion project. With the probability of 50% for the project being done, you add this NPV amt to the base case.
I found the Corp. Finance challenging. A lot of tiny detail calculations you have to watch out.

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simeezee

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3^#

发表于 2013-4-12 22:30 | 只看该作者

it is challenging, and lots of hidden assumptions as well!

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Chuckrox8

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4^#

发表于 2013-4-12 22:30 | 只看该作者

is this the question related to the options? feeling lazy to pick up the book and check, right now.
If so, on the basis on the pre-option NPV - you have to do it based on the probability weighted after-tax cash flows. But for the “option” part - you realize that it will be realized (or become feasible) only when the higher cash flow is available. Otherwise, you would not choose to exercise the option.

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