Real Options

Which of the following does NOT represent an option to expand?

• A dry cleaner purchases equipment that can be easily sold to other dry cleaners.
• A firm rents more office space than it forecasts it will need in the new future.
• A company tests the market for its new product in selected locations.
• A university builds a new library surrounded by empty land.

PTT PCL controls offshore oil leases. It is considering the construction of a deep-sea oil rig at a cost of $200 million. Because of geopolitical tension, oil prices are uncertain and are equally likely to be $40/barrel or $80/barrel in the future. Therefore, the expected price of oil is $60/barrel and extraction costs are $55/barrel. PTT expects costs to remain constant. The rig will produce an estimated 2,000,000 barrel per year forever. The cost of capital is 10% per year. Ignore taxes. If PTT decides to invest now, what is the expected NPV of the project in $ million?

• -100
• 100
• -200
• 200

PTT PCL controls offshore oil leases. It is considering the construction of a deep-sea oil rig at a cost of $200 million. Because of geopolitical tension, oil prices are uncertain and are equally likely to be $40/barrel or $80/barrel in the future. Therefore, the expected price of oil is $60/barrel and extraction costs are $55/barrel. PTT expects costs to remain constant. The rig will produce an estimated 2,000,000 barrel per year forever. The cost of capital is 10% per year. Ignore taxes. PTT has an option to abandon the rig after one year. In this case, it will receive the first year’s cash flow and then shut down the rig. The rig can be scrapped in return for $150 million. With this option to abandon, what is the expected NPV of the project in $ million?

• 104.5

• 136.4

• 150.0

• 36.4

PTT PCL controls offshore oil leases. It is considering the construction of a deep-sea oil rig at a cost of $200 million. Because of geopolitical tension, oil prices are uncertain and are equally likely to be $40/barrel or $80/barrel in the future. Therefore, the expected price of oil is $60/barrel and extraction costs are $55/barrel. PTT expects costs to remain constant. The rig will produce an estimated 2,000,000 barrel per year forever. The cost of capital is 10% per year. Ignore taxes. Ignore taxes. If, instead, PTT waits for one year to see what the oil price will be before investing, what is the expected NPV of the project in $ million?

• 136.4

• 150.0

• 127.3

• 75.0

PTT PCL controls offshore oil leases. It is considering the construction of a deep-sea oil rig at a cost of $200 million. Because of geopolitical tension, oil prices are uncertain and are equally likely to be $40/barrel or $80/barrel in the future. Therefore, the expected price of oil is $60/barrel and extraction costs are $55/barrel. PTT expects costs to remain constant. The rig will produce an estimated 2,000,000 barrel per year forever. The cost of capital is 10% per year. Ignore taxes. If, instead of waiting, PTT can buy market report that will reveal future oil price immediately. What is the maximum amount that PTT would pay?

• 13.6

• 0.0

• 22.7

• 75.0

Suppose instead of $40/barrel or $80/barrel next year, the oil prices are going to be either $20/barrel or $100/barrel next year. Which of the following statements is FALSE?

• The value of waiting to see what the oil price will be lower than under the old prices.

• The expected NPV for constructing the oil rig immediately is still the same.

• The option to abandon the oil rig after one year is more valuable than before.

• The NPV of the oil rig is more positive when oil price is $100/barrel than when oil price is $80/barrel.

Osotspa plans to launch a new energy drink, M-88, and is considering conducting a market research on consumer tastes. Without the research, Osotspa believes there is a 60% chance that the product will be successful. If successful, the project will have NPV of 150 million Baht; if the product is a failure, the NPV will be -200 million Baht. If Osotspa decides to conduct the research, the product launch will be delayed by 1 year. With the research, Osotspa believes it can increase the chance of success to 70%. Osotspa's cost of capital is 20%. What is the NPV of the M-88 project if it is launched today?

• 10.0

• -25.0

• 45.0

• 27.5

Osotspa plans to launch a new energy drink, M-88, and is considering conducting a market research on consumer tastes. Without the research, Osotspa believes there is a 60% chance that the product will be successful. If successful, the project will have NPV of 150 million Baht; if the product is a failure, the NPV will be -200 million Baht. If Osotspa decides to conduct the research, the product launch will be delayed by 1 year. With the research, Osotspa believes it can increase the chance of success to 70%. Osotspa's cost of capital is 20%. The consumer research will cost Osotspa money. What is the maximum amount that Osotspa will be willing pay to conduct the research?

• 27.5

• 35.0

• 37.5

• 29.2