A Company has 8 million Kg of Coppar. Mining will include 1.25 million Rs.

Of cost for one year of developm Extraction Cost 0.85 Rs. At beginning of extraction phase. (One year after development phase is initiated). Sal Current Spot Price 0.95 per Kg. Change in the price of coppar is 7% and Standard Deviation is 20% per annu Required Rate of return is 10% and riskless rate is 5%.

NPV Analysis Initial Cost Quantity S0 Price change Required Rate of Return Extraction Cost OutPut data Expected Price of Coppar in 1 year S1 Outflow Inflow Expected NPV

-1.25 8 million Kg 0.95 per KG 7% 10% 0.85 per KG

1.01888 -1.25 1.22824 -0.02176

Decision Project is Rejected Because of Negative Expected NPV

r one year of development immidietely. phase is initiated). Sale of coppar would be at spot price as of coppar as of beginning of extraction phase. iation is 20% per annum.

Black-Scholes Model:
Input Data Stock Price now (P) Exercise Price of Option (EX) Number of periods to Exercise in years (t) Compounded Risk-Free Interest Rate (rf) Standard Deviation (annualized s) Output Data Present Value of Exercise Price (PV(EX)) s*t^.5 d1 d2 Delta N(d1) Normal Cumulative Density Function Bank Loan N(d2)*PV(EX) Value of Call Value of Put 7.6 6.8 1 5.00% 20.00%

6.4684 ,=K*e^(-rt) 0.2000 ,=Std. * t^1/2 0.9061 0.7061 0.8176 4.9156 1.2979 0.1663

Decision Option Adjusted Present value 0.0479 Accept Project because of Positive Expected NPV

You are examining the financial viability of investing in some abandoned copper mines in Chile, which still ha suggests that there might be 10 million pounds of copper in the mines still and that the cost of opening up the m output rate is 400,000 pounds a year and the price of copper is expected to increase 4% a year. The Chilean G mine. The average production cost is expected to be 40 cents a pound and the current price per pound of copp year, once initiated.) The annualized standard deviation in copper prices is 25% and the twenty-five year bond budgeting techniques. b. Estimate the value of the mine based upon an option pricing model. c. How would yo

NPV Analysis Initial Cost Quantity S0 Price change years Risk Free Production Cost Production Cost Change OutPut data Present Values of Inflows Outflow

0 400000 million Kg 0.85 per KG 4% 25.00 7% 0.4 per KG 3%

3309755.06 3000000

Expected NPV

309755.06

Decision Option Adjusted Present value Project should be delayed because call value is greater then present NPV

828674.0148

s in Chile, which still have significant copper deposits in them. A geologist survey cost of opening up the mines will be $3 million (in present value dollars). The capacity % a year. The Chilean Government is willing to grant a twenty-five year lease on the price per pound of copper is 85 cents. (The production cost is expected to grow 3% a he twenty-five year bond rate is 7%. a. Estimate the value of the mine using traditional capital model. c. How would you explain the difference between the two values?

Black-Scholes Model:
Input Data Stock Price now (P) Exercise Price of Option (EX) Number of periods to Exercise in years (t) Compounded Risk-Free Interest Rate (rf) Variance Standard Deviation (annualized s) Annualized dividend yield Output Data Present Value of Exercise Price (PV(EX)) s*t^.5 d1 d2 Delta N(d1) Normal Cumulative Density Function N(d2) Bank Loan N(d2)*PV(EX) Delta N(-d1) Normal Cumulative Density Function N(-d2)

Value of Call Value of Put

3309756 3000000 25 7.00% 0.04% 25.00% 4.00%

521321.8304 ,=K*e^(-rt) 1.2500 ,=Std. * t^1/2 1.3036 0.0536 0.9038 0.5214 271805.1880 0.0962 0.4786

828674.0148 132404.6575

Reliable Machinery Inc. is considering expanding its operations in Thailand. The initial analysis of the project The project is expected to generate $85 million in after-tax cash flows every year for the next 10 years. Th generates much higher cash flows than anticipated, you will have the exclusive right for the next 10 years (from 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 subs this investment is expected to be 12% as well. The riskfree rate is 6.5%. a. Estimate the net present value of th b. Estimate the value of the expansion option.

NPV Analysis Initial Cost Projected Cashflow Percentage Year

-750 85 12% 10.00

OutPut data

Inflow Outflow

480.27 -750

Expected NPV

-269.73

Decision Option Adjusted Present value Accept Project because of Positive Expansion call value

477.2832

analysis of the projects yields the following results. the next 10 years. The initial investment in the project is expected to be $750 million. The cost of capital for the project is he next 10 years (from a manufacturing license) to expand operations into the rest of South East Asia. A current analysis dollars). 5 years. There is substantial uncertainty about these cash flows and the standard deviation in the present value is 40%. T et present value of the initial investment.

Black-Scholes Model:
Input Data Stock Price now (P) Exercise Price of Option (EX) Number of periods to Exercise in years (t) Compounded Risk-Free Interest Rate (rf) variance Standard Deviation (annualized s) Cost of delay Output Data Present Value of Exercise Price (PV(EX))

s*t^.5 d1 d2 Delta N(d1) Normal Cumulative Density Function N(d2) Bank Loan N(d2)*PV(EX) Delta N(-d1) Normal Cumulative Density Function N(-d2) Value of Call Value of Put

apital for the project is 12%.If the project Asia. A current analysis suggests the

present value is 40%. The cost of capital for

0.31623 1021.63 2000 10 6.50% 0.00% 40.00% 0.00%

1044.0916 ,=K*e^(-rt)

1.2649 ,=Std. * t^1/2 0.6153 -0.6496 0.7308 0.2580 269.3334 0.2692 0.7420 477.2832 499.7448