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Question 1.

a. Real option explanation- Option to expand (Call Option) benefits over conventional NPV approach.

b. Investment Appraisal Phase 1- Arrive at negative NPV though could not recollect the figure.

c. Phase 2. Call option (Option to expand after the phase 1 result). The confusion will be on figure for Pa as Pe is given as $140m. Now Pa= 140m/1.12^4. Whoever is doubting this figure should consult text and past questions on real option approach. Saying Pa=Pe is nothing but false.

Question 2. It bases on Dividend policy and one needs to be careful not to waste much time.

Question 3. Organisation restructuring. No ambiguity on this as larger percentage of the students that answered this question would get pass mark.

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