Prob. 1 Zion Aviation Rates: Discount rate6.0% Option Pricing: Risk-free rate2.5% PV of Cap. Ex. (Yrs. 1-2) Scenario: No Real Options Maturity4.0 Start1234567 PV of NCF Cash from Operations...

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Prob. 1 Zion Aviation Rates: Discount rate6.0%Option Pricing: Risk-free rate2.5%PV of Cap. Ex. (Yrs. 1-2) Scenario: No Real Options Maturity4.0 Start1234567PV of NCF Cash from Operations1.03.04.96.98.810.812.7Risk free rate minus: Capital Expenditures1.06.05.51.01.31.51.82.0Volatility35% = Net Cash Flow (NCF)BS calculations: Terminal Value11.0d1ERROR:#DIV/0! PV of NCFN(d1)ERROR:#DIV/0! Scenario: Real Options d2ERROR:#DIV/0! Start1234567N(d2)ERROR:#DIV/0! Cash from Operations- 01.03.04.96.98.810.812.7Price of callERROR:#DIV/0! alfonso canella: alfonso canella: This is the option pricing formula. It is called the Black-Scholes formula as it was devised by Fisher Black and Myron Scholes. It has five inputs: time to maturity (in years), risk free rate (the alternative investment), the volatility of prices for the specific project (so if this were an oil industry project, the volatility would be the price volatility of crude oil), the strike price (that is, the PV of the Cap Ex necessary to do the project), and the present value of the cash flows that accrue from doing the project. minus: Capital Expenditures1.01.01.31.51.82.0Difference: = Net Cash Flow (NCF) - Value of Option over PVERROR:#DIV/0! Terminal Value11.0 - % of PVERROR:#DIV/0! PV of NCF alfonso canella: alfonso canella: The NPV function of Excel makes quick work of the yearly cash flows by present valuing them according to when they happen. The terminal value must also be included. It can be put in as a year 16 and included in the NPV function or as a year 15 cash flow, as done here.PV of Cap. Ex. (Yrs. 1-2) alfonso canella: alfonso canella: The largest cash outflows in the project are considered to be the cost of doing the project. The smaller cash outflows are seen to be operating costs. So, the two large Cap Ex are discounted using the risk free rate as these investments will be made no matter what. Because they will be made no matter what, they are not risky, so the risk free rate is used. alfonso canella: alfonso canella: This is the option pricing formula. It is called the Black-Scholes formula as it was devised by Fisher Black and Myron Scholes. It has five inputs: time to maturity (in years), risk free rate (the alternative investment), the volatility of prices for the specific project (so if this were an oil industry project, the volatility would be the price volatility of crude oil), the strike price (that is, the PV of the Cap Ex necessary to do the project), and the present value of the cash flows that accrue from doing the project. alfonso canella: alfonso canella: The NPV function of Excel makes quick work of the yearly cash flows by present valuing them according to when they happen. The terminal value must also be included. It can be put in as a year 16 and included in the NPV function or as a year 15 cash flow, as done here. Prob. 2 Network Expansion with New Aircraft StartPhase IPhase IIPhase IIIPV of RevenuesCostsNetProbabilityExpected Value Success115 70%9 Utah 50%7 Failure- 0 30%1 Success122 55%19 Colorado 22%8 Failure- 0 45%2 Success 72%9Success99 55%15 Arizona 20%12 StartFailure- 0 545%2 Failure- 0 8%2 Failure- 0 28%5Total v. MAR 2022 No content - Intentionally left blank