# Essay on Net Present Value and Capacity Planning

Real Options Analysis Practice Questions and Solutions

CAPACITY PLANNING

Question 1: PROJECT SABLE Use a 30% per year discount rate to evaluate Project Sable, which has two phases. You may invest in the first, in both or in neither. You may not invest in the second phase without investing in the first. Phase 1 requires an investment of $100. One year later the project delivers on the average $120. At that time, after the phase 1 payout has been received, you may invest an additional $100 for phase 2. One year later, phase 2 pays out on the average $140. However, phase 2`s payout can go up or down by 20%. a. How much would Project Sable be worth if it offered only the phase 1 opportunity? b. How much would

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CAPACITY PLANNING

Phase1+ Alternative-1

Phase 1+ Alternative-2

-7.48+58.12

-7.48+63.30