Bài giảng Financial Management - Chapter 14: Risk and Managerial (Real) Options in Capital Budgeting

Chapter 14Risk and Managerial (Real) Options in Capital BudgetingAfter Studying Chapter 14, you should be able to:Define the "riskiness" of a capital investment project. Understand how cash-flow riskiness for a particular period is measured, including the concepts of expected value, standard deviation, and coefficient of variation.Describe methods for assessing total project risk, including a probability approach and a simulation approach. Judge projects with respect to their contribution to total firm risk (a firm-portfolio approach). Understand how the presence of managerial (real) options enhances the worth of an investment project.List, discuss, and value different types of managerial (real) options.Risk and Managerial Options in Capital BudgetingThe Problem of Project RiskTotal Project RiskContribution to Total Firm Risk: Firm-Portfolio ApproachManagerial OptionsAn Illustration of Total Risk (Discrete Distribution)ANNUAL CASH FLOWS: YEAR 1PROPOSAL A State Probability Cash FlowDeep Recession 0.05 $ –3,000Mild Recession 0.25 1,000Normal 0.40 5,000Minor Boom 0.25 9,000Major Boom 0.05 13,000Probability Distribution of Year 1 Cash Flows0.400.050.25Probability–3,000 1,000 5,000 9,000 13,000Cash Flow ($)Proposal A CF1 P1 (CF1)(P1)$ –3,000 0.05 $ –150 1,000 0.25 250 5,000 0.40 2,000 9,000 0.25 2,250 13,000 0.05 650 S=1.00 CF1=$5,000Expected Value of Year 1 Cash Flows (Proposal A)Variance of Year 1 Cash Flows (Proposal A) (CF1)(P1) (CF1 – CF1)2(P1) $ –150 (–3,000 – 5,000)2 (0.05) 250 ( 1,000 – 5,000)2 (0.25) 2,000 ( 5,000 – 5,000)2 (0.40) 2,250 ( 9,000 – 5,000)2 (0.25) 650 (13,000 – 5,000)2 (0.05) $5,000Variance of Year 1 Cash Flows (Proposal A) (CF1)(P1) (CF1 – CF1)2*(P1) $ –150 3,200,000 250 4,000,000 2,000 0 2,250 4,000,000 650 3,200,000 $5,000 14,400,000Summary of Proposal AThe standard deviation = SQRT (14,400,000) = $3,795The expected cash flow = $5,000Coefficient of Variation (CV) = $3,795 / $5,000 = 0.759CV is a measure of relative risk and is the ratio of standard deviation to the mean of the distribution.An Illustration of Total Risk (Discrete Distribution)ANNUAL CASH FLOWS: YEAR 1PROPOSAL B State Probability Cash FlowDeep Recession 0.05 $ –1,000Mild Recession 0.25 2,000Normal 0.40 5,000Minor Boom 0.25 8,000Major Boom 0.05 11,000Probability Distribution of Year 1 Cash Flows0.400.050.25Probability–3,000 1,000 5,000 9,000 13,000Cash Flow ($)Proposal BExpected Value of Year 1 Cash Flows (Proposal B) CF1 P1 (CF1)(P1)$ –1,000 0.05 $ –50 2,000 0.25 500 5,000 0.40 2,000 8,000 0.25 2,000 11,000 0.05 550 S=1.00 CF1=$5,000Variance of Year 1 Cash Flows (Proposal B) (CF1)(P1) (CF1 – CF1)2(P1) $ –50 (–1,000 – 5,000)2 (0.05) 500 ( 2,000 – 5,000)2 (0.25) 2,000 ( 5,000 – 5,000)2 (0.40) 2,000 ( 8,000 – 5,000)2 (0.25) 550 (11,000 – 5,000)2 (0.05) $5,000Variance of Year 1 Cash Flows (Proposal B) (CF1)(P1) (CF1 – CF1)2(P1) $ –50 1,800,000 500 2,250,000 2,000 0 2,000 2,250,000 550 1,800,000 $5,000 8,100,000 Summary of Proposal BThe standard deviation of B –($266.67)What is the “new” project value?Project Abandonment $ 2,238.32 $ 1,331.29 $ 1,059.18 $ 344.90 $ 72.79–$ 199.32 –$ 1,280.95 –$900(0.20) $1,200 (0.20) –$400*(0.60) $450Year 1123(0.60) $1,200(0.30) $ 900(0.10) $2,200(0.35) $ 900(0.40) $ 600(0.25) $ 300(1.0) $ 0Year 2*–$600 + $200 abandonmentSummary of the Addition of the Abandonment Option* For “True” Project considering abandonment optionThe standard deviation* = SQRT (740,326) = $857.56 The expected NPV* = $ 71.88 NPV* = Original NPV + Abandonment Option Thus, $71.88 = –$17.01 + Option Abandonment Option = $ 88.89