Finance Chapter 14 The New Facility Will Not Used Until

Revised Shockley, Chapter 14 Problems:

Problem 1:

Replacement of Figure 14.1:

Q0

Q1

Q2

Q3

Q4

Replacement of Figure 14.7:

Q0

Q1

Q2

Q3

Q4

Consequently, there is no potential for “regrets” due to exercising at a loss, but there is

Problem 2:

Replacement of Figure 14.7:

Q0

Q1

Q2

Q3

Q4

Consequently, there is no potential for “regrets” due to exercising at a loss, but there is

Problem 3:

Regrets is Problem 1 occur due to not being to exercise the option when the price in the

fourth quarter is $134.99 (i.e. a loss of $14.99):

Regrets is Problem 2 occur due to not being to exercise the option when the price in the

fourth quarter is $164.87 (i.e. a loss of $29.87):

Problem 4:

Determine the number of years before the new facility will be used:

Problem 5:

The new facility will not be used until 2003 making the free cash flow for 2000 through

Problem 6:

The lower bound within the option pricing tree is higher because in addition to the

Problem 7:

$1.7 billion in cost:

The free cash flows are reduced by the change in the annual depreciation tax shield:

The free cash flows are increased by the change in the annual depreciation tax shield:

Consequently, the sum of the discounted free cash flows becomes: $13,019.05 million

Problem 8:

The value of keeping the option alive:

Problem 9:

The value of keeping the option alive:

Problem 10:

The net increase in option value due to lower “regrets” is $681.45 million. The cost of

the “Fab Shell” is $800 million and the present value of the depreciation tax shield is: