Embry Riddle Aeronautical University Calculate PV of NCF In Excel Worksheet
calculate the PV of NCF for “Scenario: No Real Options”, which stands for Present Value of Net Cash Flow. And i need the same thing done for “Scenario: Real options.” I also need to know the formula that is used to conduct the final solution. From my understanding, you are supposed to use the Black-Scholes Option Pricing formula.
For reference, here is what the problem set says:
A. JTM Airlines is looking at buying more gates at their home airport. JTM’s discount rate is 5.5% and the risk free rate is 2.0%. What is the NPV of the gate purchases if it boughtthem today? Use the data in the Excel template provided.
B. After you run the numbers for part A, you remember back to the concept of realoptions, which means that JTM can make investment decisions as time passes:
1. Present valuing the purchase price of the gates (that is, the years 1 and 2 Capital Expenditures) separately using the risk-free rate. Once JTM decides to go ahead with the purchase, there is no risk to that expenditure.
2. Present valuing the Net Cash Flow excluding those purchase prices. Thiscalculation will include Cap. Ex. for years 3-15 as they are part of the normaloperation of the gates and are unrelated to the purchase price.
3. Use the Black-Scholes Option Pricing formula to come up with option’s priceassuming a 2-year maturity and a 15% price volatility for gate prices.
4. Compare the price of the call option with the NPV in the No Real Optionsscenario. Is the option worth it?
