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Description

Hello there I am looking for a tutor that have the ability to help me understand how to answer and solve questions like these:
Example question:

Assume that you represent Tufo, a company that designs and sells special medical equipment. You are considering a contract with Lufi, a manufacturer of the special medial equipment for the next four years. The estimated static NPV is $5 000 per unit (calculated by discounting back the estimated average price per unit in each year at a risk-free rate). Lufi estimates the manufacturing cost to be $3 000 per unit and you estimate that 10 000 units can be sold in the next four years. The risk-free rate is 5% and the volatility of the static NPV is 30%. You plan to revise your decision after two years. This project is embedded with three options that increase the managerial flexibility:

Option 1: There is an opportunity to expand and sell an additional 2 000 units (20%) during the first two years. To undertake this expansion opportunity, it will cost $16 million. During the second two years there is a possibility to expand and sell an additional 1 000 units (10%), which is assumed to increase the expansion cost by 25%.
Option 2: During the first two years, there is an opportunity to contract the project by 30% to a competitor, Bufi. Contraction is estimated to save costs up to $20 million. During the second two years this contraction possibility decreases by 10%, which will decrease the contraction gain by 20%.
Option 3: During the first two years, you may abandon the project for $16m of salvage value, which will decrease by 30% during the second two years.

How much is this project worth? What is the value of the chooser option?
Posted Date
10/26/2020

Listing ID
75172069
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