BlueTech is planning to market and sell its new Bluetooth-enabled shoe in two ma
ID: 2647748 • Letter: B
Question
BlueTech is planning to market and sell its new Bluetooth-enabled shoe in two markets: national and international. The local market will require an initial investment and will have cash inflows for three years. If things work out, they will invest in an expansion and sell internationally, expecting benefits for four years. Assume a MARR of 12% and a risk-free interest rate of 6 %. Consultants suggest that the volatility of the cash flows is between 35% and 50%. Discuss their expansion strategy.
Year $
0 Invest $30 Million
1 $10 Million
2 $12 Million
3 $14 Million
4 Invest $60 Million
4 $16 million
5 $18 Million
6 $20 Million
7 $20 Million
Hint: You may use black-scholes formula
Explanation / Answer
If the Net Present Value of the project is positive then the project can be accepted, also if all the available similar investment options have same volatility in cash flow.