Question

Now suppose this project has an investment timing option, because it can be delayed for a year. The cost will still be $70 million at the end of the year, and the cash flows for the scenarios will still last 3 years. However, Tropical Sweets will know the level of demand and will implement the project only if it adds value to the company. Perform a qualitative assessment of the investment timing option’s value.

Answer 1

Explanation:

Qualitative analysis;

The given case belongs to real options in finance terms where the project offers tangible assets in comparison to financial instruments.

The project is of real option. The value of any real option would be more when:

• the project under consideration is very risky
• With respect to timing option value, there is time to change the decisions

Having said that, since project is risky and investment can be made later, hence it would be more feasible to wait and observe

Answer 2

Answer:

Refer below.

Explanation:

Qualitative Assessment

The value of real option increases if:

1.the underlying project increases risk.

2.there is quite a while before you should practice the alternative.

Therefore,

The project is risky and has 1 year before we should choose, so the alternative to hold up is likely important.