16.2 The “Dubi Dubbel” investment of Problem 16.1 is one of five brewery invest- ments that Grolsch is considering. The quality of the beer produced in Dubiety will determine the quality of beer that Grolsch can expect from the other four investments. Grolsch will not know the quality of beer or its price until pro- duction begins. The situation is similar to Problem 16.1. Initial investment Price of beer in 1 year Variable production cost Fixed production cost Expected production Discount rate 10 = D200,000,000; rises by 10% each year P1 = D25 or D75 with equal probability VC=D10 per bottle FC = D10,000,000 per year Q
= 1,000,000 bottles per year forever i= 10% a. Draw a decision tree that depicts Grolsch’s investment decision. b. Calculate the NPV of investing as if it were a now-or-never alternative. Real Options and Cross-Border Investment Strategy 401 c. Calculate the NPV of investing in an exploratory brewery and then recon- sidering investment in the other breweries in one year after the price of beer is revealed by the initial investment. d. Calculate the NPV of investing today, including all opportunity costs. e. Should Grolsch invest today? What is different in this problem from the setting in Problem 16.1, and how does it affect Grolsch’s decision?
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