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Describe in detail with example. Please describe the real option inherent in each...

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Finance

Describe in detail with example.

  1. Please describe the real option inherent in each of the following cases and provide some real-life hypothetical cases. Also, explain in each case if the option seller is involved and who that seller might be.

a. Moda di Milano postpones a major investment. The expansion has positive NPV on a discounted cash-flow basis, but top management wants to get a better fix on product demand before proceeding.

b. Western Telecom commits to production of digital switching equipment specially designed for the European market. The project has a negative NPV, but it is justified on strategic grounds by the need for a strong market position in the rapidly growing, and potentially very profitable, market.

c. Western Telecom vetoes a fully integrated, automated production line for the new digital switches. It relies on standard, less-expensive equipment. The automated production line is more efficient overall, according to a discounted cash-flow calculation.

d. Mount Fuji Airways buys a jumbo jet with special equipment that allows the plane to be switched quickly from freight to passenger use or vice versa.

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