Problem 1:
(Future investment option) You are evaluating an investment in a carpet cleaning business in Plattsburgh, NY. The NPV of the investment is −$2 million. For an additional outlay of $0.1 million, you will have the option to add additional carpet cleaning businesses in the region. If circumstances are favorable (probability = 0.5), the expansion option has an NPV of $5 million. If circumstances are unfavorable (probability = 0.5), the expansion option has an NPV of 0. What is the total NPV of the investment, including the cost and expected value of the expansion option?
Problem 2:
(Cash budgeting) Tulsa Well Supply Company has a cash balance at the end of June of $1,200,000, and it predicts the net cash flows (in $1,000s) given here for the next six months. If Tulsa must keep a cash balance of at least $1,000,000 at all times, when and how much will it need to borrow to maintain this minimum cash balance?
JUL. AUG. SEP. OCT. NOV. DEC.
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