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Analyzing Strategy Using Option Analysis

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Reliable Industries is considering the construction of a power plant investment in India. Reliable analysts calculate that the cost of building the plant is $600 million, and the IRR of the plant is 13%. The analysts also estimate that given the experience of building the first plant, a second plant can be built for $550 million, and additional plants can be built for $500 million each.

1.How would you go about evaluating whether to build or not to build this power plant in India?
2.Are you evaluating a project or a strategy?
3.How does the risk associated with the power plant strategy compare with the risk associated with the individual power plants?

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OPTION ANALYSIS
Reliable Industries is considering the construction of a power plant investment in India. Reliable analysts calculate that the cost of building the plant is $600 million, and the IRR of the plant is 13%. The analysts also estimate that given the experience of building the first plant, a second plant can be built for $550 million, and additional plants can be built for $500 million each.

EVALUATING WHETHER TO BUILD OR NOT TO BUILD THIS POWER PLANT IN INDIA
The decision criterion on the use of IRR may be used in determining whether to build or not to build the power plant in India. The Computed Internal Rate of ...

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