FINANCE Corporate financial policy and R and D Management

Real Options and the Investment Decision 55

TABLE 4.2 Economic Scenarios of the Economy and Project Cash Flow

Year 1 Year 2 Year 3

Cash Cash Cash
State of Flow Flow Flow
Economy Probabilities ($mm) Probabilities ($mm) Probabilities ($mm)

Depression .10 $10 .15 $ 5 .20 $ 1
.35 10 .50 25
.40 20 .25 30
.10 30 .05 40
Recession .30 15 .10 10 .15 3
.40 20 .45 20
.35 50 .30 30
.15 60 .10 40
Normal .40 25 .05 20 .05 20
.20 25 .33 30
.50 50 .61 60
.25 75 .01 90
Boom .20 40 .01 30 .01 30
.10 45 .14 40
.40 60 .40 75
.49 100 .45 200

TABLE 4.3 Calculation of Expected Net Present Value

State of Cash Flow PVIF PV
Economy Year 1 Year 2 Year 3 Year 1 Year 2 Year 3 CF Prob1 Prob2 Prob3 JointProb E PV

Depression 10 5 1 0.909 0.826 0.751 13.974 0.10 0.15 0.20 0.00300 0.04
10 5 25 0.909 0.826 0.751 32.006 0.10 0.15 0.50 0.00750 0.24
10 5 30 0.909 0.826 0.751 35.763 0.10 0.15 0.25 0.00375 0.13
10 5 40 0.909 0.826 0.751 43.276 0.10 0.15 0.05 0.00075 0.03
10 10 1 0.909 0.826 0.751 18.107 0.10 0.35 0.20 0.00700 0.13
10 10 25 0.909 0.826 0.751 36.138 0.10 0.35 0.50 0.01750 0.63
10 10 30 0.909 0.826 0.751 39.895 0.10 0.35 0.25 0.00875 0.35
10 10 40 0.909 0.826 0.751 47.408 0.10 0.35 0.05 0.00175 0.08
10 20 1 0.909 0.826 0.751 26.371 0.10 0.40 0.20 0.00800 0.21
10 20 25 0.909 0.826 0.751 44.403 0.10 0.40 0.50 0.02000 0.89
10 20 30 0.909 0.826 0.751 48.159 0.10 0.40 0.25 0.01000 0.48
10 20 40 0.909 0.826 0.751 55.672 0.10 0.40 0.05 0.00200 0.11
10 30 1 0.909 0.826 0.751 34.636 0.10 0.10 0.20 0.00200 0.07
10 30 25 0.909 0.826 0.751 52.667 0.10 0.10 0.50 0.00500 0.26
10 30 30 0.909 0.826 0.751 56.424 0.10 0.10 0.25 0.00250 0.14
10 30 40 0.909 0.826 0.751 63.937 0.10 0.10 0.05 0.00050 0.03
(Continued)