16.1 A proposed brewery in the Central European country of Dubiety will produce a beer—the “Dubi Dubbel”—for Grolsch N.V. of the Netherlands. A number of other European brewers have announced plans to produce and sell beer in the Dubi market. If too many breweries open, beer prices will fall. If some of these investment plans do not materialize, prices are likely to rise. The price of beer is determined exogenously and will be known with certainty in one year. Grolsch management must decide whether to begin production today or in one year. The following facts apply: Initial investment Price of beer in 1 year Variable production cost Fixed production cost Expected production Discount rate Io = 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. c. Calculate the NPV (at t = 0) of waiting one year before deciding. d. Calculate the NPV of investing today, including all opportunity costs. e. Should Grolsch invest today or wait one year before making a decision? 16.6 Grolsch management has gone ahead with the investment in Problem 16.1. The market has grown increasingly competitive, and nearly all of the brew- ery investments in Central Europe are losing money. To make matters worse, variable production costs of D20/bottle are higher than expected. According to local laws, employees cannot be laid off so long as the brewery is open, and Grolsch must either produce at capacity or close the brewery. A competi- tor is considering exiting the market. If this brewer does not abandon, price will remain D15/bottle. If the brewer abandons, price will rise to D35/bottle. Assume Grolsch’s abandonment decision does not influence the competitor’s decision, so price uncertainty is exogenous. The following facts apply to the abandonment decision: Cost of abandoning Current price of beer Price of beer in 1 year Variable production cost Fixed production costs Expected production Discount rate 10 = D10,000,000; rises by 10% each year Po =D15 per bottle in perpetuity P, = D15 or D35 with equal probability VC = D20 per bottle FC = D10,000,000 per year Q = 1,000,000 bottles per year forever i = 10% Note that the cash flows of this abandonment option are similar to those of the investment option. Grolsch management can pay an exercise price today to avoid future losses. But avoiding future losses is the same thing as receiving a net cash inflow-just as in the investment option. a. Draw a decision tree that depicts Grolsch’s investment decision. b. Calculate the NPV of abandoning as if it were a now-or-never alternative. c. Calculate the NPV of waiting one year before making a decision. d. Calculate the NPV of abandoning today, including all opportunity costs. e. Should Grolsch abandon this losing venture today?
Get Finance homework today
We aim at 100% customer satisfaction. As such, we never compromise on the quality of our assignment services and strive to maintain the highest standards of work for all our clients. Our writers craft each paper carefully to match the requirements on the instructions form while at the same time being surgical and objective while handling client work.
We receive many applications from writers around the world daily. Nevertheless, we only choose the cream of the crop to tackle your “help with homework” requests. Hence, our homework helpers are highly-qualified individuals who adhere to our quality policy.
We maintain a fair pricing policy for all our homework help services. Our pricing system generates quotations based on the requirements of each paper. Hence regardless of the complexity or duration of a paper, our system determines the most accurate and pocket-friendly price for all our clients.
At MyHomeworkWriters, we guarantee all students swift delivery of their assignments. We understand that time is an essential factor in the academic world. We, therefore, ensure that all assignments are delivered on or before the agreed deadline. This leaves room for editing to incase the client wants changes done to the work delivered by our writers.
We maintain a zero-plagiarism policy in all our papers. Our writers stick to the instructions to deliver plagiarism-free work. Other than that, they extensively research the work they are handling and are keen to avoid any chance of similarities with previously written papers. Our editors check every completed work to ascertain it’s at the set standards.
Our main objective is to assist you through every step of your academic journey. Thus, we completely understand that you might run into trouble once in a while when interacting with our system. If you do run into trouble, please get in touch with our support agents and they will immediately provide you with assistance. Feel free to contact us via the Chat window or email: firstname.lastname@example.org.
Follow these simple steps to get your homework done
Fill in the order form and provide all details of your assignment.
Choose the payment system that suits you most.
You will be able to track the progress of your paper from our system.
Once your paper is ready, we will email it to you.
Myhomeworkwriters holds a reputation for providing high-quality assignment writing services. You only need to give us all the requirements for your “do my homework” order, and our writers will give you the best results.
Our team is skilled and equipped in searching for information required to complete work handed over to them. Regardless of the complexity of the work, we are determined to get the job done. Extensive research when handling client requests makes it possible for us to be able to stick to the boundaries and guidelines set by the clients. Thus enabling us to keep the work original and plagiarism free.
We have highly qualified writers to assist you whenever you place in "help with my homework" order. Our essay writing service is designed to not only help students get good grades but also excel in their studies. Our writers are highly experienced and educated specialists and professionals who want to do more than creating a difference in the academic field.
Our editors have a keen eye when going through work. They can capture even the smallest of errors. This has been made possible by the fact that we have been in the academic field for more than 5 years now. Thus, they bring with them previous experience when going through work to be able to capture everything. These unique skills make it possible for us to deliver error-free work to our clients.
Our team has very experienced specialists and professionals. This gives us a competitive edge over our competitors. Whenever we receive work that needs to be redone, everyone gets involved. That’s inclusive of our editors. This collective involvement in doing work makes it possible for us to deliver high-quality work to all our clients. Other than that it makes it possible for us to adhere to our originality and plagiarism-free policies.