In this class, we identify and value expansion and abandonment options. 

 

 

 

Assignment Sheet
Emerging Markets Finance
Darden Graduate School of Business
Spring First Half 2002

Class #15, Thursday, February 28, 2002

Topic: Real Options and Investment Staging

Case: Dragon Beer, UVA F-1382.

File: Dragon-beer-V1.XLS

The objective of this class is to consider the value of staging investments in emerging markets. 

Assignment Questions:

  1. Using Tsingtao as a comparable, calculate the cost of equity for Dragon Beer using the downside risk approach.
  2. What is the net present value of Dragon Beer's first stage project if we ignore the possibility of a follow-on investment?  What valuation methodology would you use to get a value?  Does it seem appropriate for the first stage?
  3. Based on the cash flow projection in Exhibit 1b, what is the net present value of the follow-up (stage 2) project?  Based on the NPV rule, would you ever recommend IBG to investment in China?   What is the value of the opportunity to investment in the second stage project?  What would happen to that value if volatility of the present value of the cash flow increases?  What does this say about investments in emerging markets?
  4. If we ignore the option to invest in the second stage, how valuable is the ability to sell the plant in year 3 (2005)?  Would IBG want to invest under this scenario?  Why?