Ways of Computing the Value of Alternative Projects Essay...

Ways of Computing the Value of Alternative Projects When deciding whether to invest in a project an investor first will compare investment or sunk costs to the expected profit and based on this decision will decide what to do. Depending on the specifics of the project calculating of sunk cost and expected profit might be rather different and will play the main role in the decision to invest, wait and invest later or not to invest at all. More detailed consideration of the standard NPV rule: to invest if present value of cash flow is greater than sunk cost will show that some projects cannot be simply estimated using this idea. For the irreversible projects such as building a factory or buying an option NPV method may not be proper†¦show more content†¦Now, consider the factory that can produce some product. There is F=100 the sunk cost of building the factory and the price of the product is P=$10 today. In a year there are two possible options: the price will go up to $15 with probability 1/2 or will go down to $5 with probab ility 1/2 and then stay at these levels. Let us calculate net present value of the project if invested today (expected price will be $10, because 1/2 ·15+1/2 ·5=10 and the interest r=0.1 for easy calculations): NPV=-100+Ó0[10/(1+r)t]=$10 notice that in this case we have summation from 0 to infinity because the process starts on the step one, it means we invest in project right now. Using our parameters we can see that NPV if invested today is equal $10. Now let us calculate net present value, but in this case we do not invest right now, but wait and invest only if the new price is 15, which happens with probability 1/2: NPV=0.5[-100/(1+r)+ Ó1[10/(1+r)t]]=$30 we have to discount the value of the sunk cost and also sum not from zero as in the first case but from 1, since we wait for a year. Thus, we can see that NPV if we wait is bigger by $20, this value is the value of flexibility or option to wait. The same thing can be computed for three-step process and more. Now we can see the difference in the calculations and gain if we wait. This gives an investor new option - to wait and gather information, so his expected profit will be higher. Of course, theShow MoreRelatedEssay On ECS1383 Words   |  6 PagesOCA is best positioned and qualified to stand up ECS: Cloud computing overview Cloud computing is a model for enabling ubiquitous, convenient, on-demand network access to a shared pool of configurable computer resources (e.g., networks, servers, storage, applications and services) tha can be rapidly provisioned and released with minimal management effort or service provider interaction. 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