Essay question of (Real option topic)

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  • #244315

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    george demian
    Participant

     

     

    Hello

    in the question he says that useful life od vendor B only 3 years

    why in the answer he calculated cash outflow based on 6 years not 3 ????

    please advise me

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  • #244347

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    Lynn Roden
    HOCK international

    Hello george demian,

    This is a comparison among three options. Because it is a comparison, they all need to be comparable, and that means they need to cover the same time period. The question says that the financial analyst has determined that a six-year time horizon is appropriate for the analysis. Therefore, each vendor’s product needs to be evaluated over a six-year time period.

    The question says that Vendor B’s initial hardware will have a useful life of three years and at the end of that period, Ultra Comp will need to replace the hardware at an estimated cost of $1,250,000. Therefore, the cash flows for Vendor B’s product include both the initial purchase and the replacement purchase that takes place at the end of Year 3.

    Lynn

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