Damodaran on Valuation_ Security Analysis for Investment and Corporate Finance ( PDFDrive )

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  • As withother realoptions, theremaybe acost to
    waitingonce theexpansionoptionbecomesviable.
    Thatcostmaytaketheformofcashflowsthatwillbe
    lostontheexpansionprojectifitisnotundertakenor
    a cost imposedonthefirmuntil itmakesits final
    decision;forinstance,thefirmmayhavetopayafee
    every year until it decides.


ILLUSTRATION 12.8: Valuing an Option to Expand:
AmBev and Guaraná


GuaranáAntarcticaisapopularcaffeine-basedsoftdrinkin
Brazil, and AmBev istheBrazilian beverage manufacturer
that produces it. Assume that AmBev is considering
introducingthedrink intotheUnitedStatesand thatithas
decided to do so in two steps.


1.AmBev willinitially introduceGuaranáinjust thelarge
metropolitan areas of theUnited States to gauge potential
demand. The expected cost of this limited introduction is
$500millionandtheestimatedpresentvalueoftheexpected
cash flowsis only $400 million.In other words, AmBev
expectstohaveanegativenetpresentvalueof$100million
on this first investment.


2.Ifthelimitedintroductionturnsouttobeasuccess,AmBev
expectstointroduceGuaranátotherestoftheU.S.market.
Atthemoment,though,thefirmisnotoptimisticaboutthis
expansionpotential andbelieves thatwhile thecostof the
full-scaleintroductionwillbe$1billion,theexpectedpresent
valueofthecashflowsisonly$750million(makingthisa
negative net present value investment as well).

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