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Hi I know the following question should be quite...




Hi I know the following question should be quite simple, but Im really struggling, please help. Calculate the present value of purchasing the option now and compare it with the present value of purchasing the land outrigh later on. Which is the better alternative why? This is a summary of the relevant bits in the case; A suitable site can be purchased now (Dec 2012) for $2m. But the site is not needed until Dec 2017, so an option on a similar site can be obtained for $100,000 on 31 dec 12. The option would give KFL the right to purchase the site for $2.6m on 31 Dec 2017. It is estimated that similar sites will then have a market value of $3m. Attached are some workings I have done, but Im not sure if I'm on the right track, especially using the 10% that I used. this leads me to the next part .... What discount rate would you use in analysing the option alternative? Why? I think this is the 10% I used but should I have used and inflation % or do I need to do some kind of IRR calc? I have found a very similar case on your website for Atlantic Aquaculture inc. capital budgeting with staged entry, but cant find any solutions for the questions.


Paper#13603 | Written in 18-Jul-2015

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