Real Option Expenses Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Problem 1

Part 1

Expected value of the project Sable = 0.5($160) +0.5($60)

= $80+ $30

Expected value of the project Sable = $110

In order to analyze the value of phase 1 of the sable project , the expected future value of the project is calculated and it is determined that if the project sable would only offer phase 1 opportunity then the worth of the project would be around $110 which indicates that it is a better investment opportunity. In addition to this, the expected future value ($110) of the sable project phase 1 is more than the initial investment that is made in the project ($100).Therefore, it is beneficial to invest in the first phase of the stable project due to the favorable outcomes for the future.

Part 2

Formula: Probability ((-20%) +probability (20%+probability*upperlimit+probability*lower limit))

Expected value of the project Sable = (0.5(-0.20) +0.5(0.20+0.5*72+0.5*128))

Expected value of the project Sable= $100

The expected future value of phase 2 of the sable project is calculated in order to estimate the worth of phase 2 of the project if it is selected today. The expected value of the Project Sable phase 2 is $100. From the results of the calculations it is analyzed that it is not a better time and not worthwhile to invest in the second phase of the Project Sable. In addition to this, the expected future value ($100) of the Sable Project phase 1 is more than the initial investment that is made in the project ($200).Therefore, it is not beneficial to invest in the second phase of the Stable Project because of the low expected future value.

Part 3

Total worth of the project = $110+ $100= $210

If there is an access to both the phases of the project then the worth of the Project Sable would be $210 Furthermore, it is better to wait in order to invest in Phase 2 of the Project Sable as well as the expected future results of phase 2 are not favorable to invest immediately. However, it is better to firstly invest in phase 1 of the Project Sable and after getting the desirable results from phase 1 then invest in phase 2 of the Project Sable.

Part 4

It is important to allocate greater portion of the investment in the real options in comparison with the assets in place as real options bring additional benefits to the Project Sable in term of evaluation of the project as well as designing and implementation of the Project Sable. However, larger allocation of the value in real option would provide the opportunity to undertake the project in a way that will provide an accessible entrée to achieve multiple activities effectively.

Part 5

Total investment = $ 200.....................

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