Expansion options and abandonment options of CMA knowledge points
Extended options:
When the external conditions of an enterprise are conducive to expanding its production capacity, the enterprise can exercise the expansion option, that is, expand its production capacity on the original basis, and then obtain higher project value.
Classic case: ABC company is currently evaluating the capital investment of product Beta, and its current production capacity is 50,000 tons. However, if the project is evaluated according to the existing production capacity, the net present value of Beta production is-500,000 US dollars. Then, the manager will not hesitate to reject the project. However, decision makers believe that the future market space of Beta is huge, and if the current production capacity is expanded, the profitability of products can be greatly improved. ABC expects that the capacity expansion will bring the company a net present value of $65,438+200,000. However, if the market shrinks in the future, the decision makers of ABC company will give up the expansion plan. The possibility of expansion and abandonment is 50% each.
Therefore, the expected NPV generated by future expansion options is $65,438+0,200,000× 0.5+$ 0× 0.5 = 600,000, and the value of the whole project should be the unexpanded NPV plus the NPV generated by expansion options, that is, the value of the whole project =-500,000 +600.
Exemption options:
Provide flexibility for early termination of projects. Giving up options can make the company gain profits under favorable conditions and reduce losses under unfavorable conditions. Generally speaking, investment projects should be abandoned when the following two situations occur:
(1) Its abandoned value (the market value when the project assets are sold) is greater than the present value of the subsequent cash flow of the project;
(2) It is better to give up the project now than at some time in the future. If the value of the abandoned project is greater than the present value of the expected cash flow of the project, consider abandoning the project; Otherwise, continue to shelve the project.
Case: 2065438+March 2006, McDonald's announced that it would introduce strategic investors into its major Asian markets, so that 95% of its Asian businesses would have local ownership, and it also announced that it would sell the franchise rights of China, Hongkong and South Korea for 20 years at a transaction price of about $2 billion to $3 billion. Cinda Asset Management Company and BTG Group participated in the bidding. McDonald's sale of the right to operate in China can be regarded as McDonald's right to give up. McDonald's doesn't sell its ownership, which shows that it still values China's business share and potential. However, according to the traditional cash flow analysis, a large amount of money needs to be continuously invested, and there is a great possibility of future losses. Selling the management right of China district in 20 16 as a waiver option can form a positive cash flow after the end of fiscal year 20 16. This avoids the loss of future cash flow.