Luther Industries Is Considering Launching a New Toy Just in Time

question 56

Essay

Luther Industries is considering launching a new toy just in time for the Christmas season.They estimate that if Luther launches the new toy this year it will have an NPV of $25 million.Luther has the option to wait one year until the next Christmas season to launch the toy,however,the demand next year will depend upon what new toys Luther's competitors introduce and therefore greater uncertainty about next years demand.Launching the new today will involve a total capital expenditure of $100 million.If the risk-free rate is 5%,N(d₁)is .62 and N(d₂)is .65,then what is the value of the option to wait until next year to launch the new toy?

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Definitions:

Dissolved

The process of formally ending or terminating a legal entity or contractual relationship, often involving the distribution of assets.

Sole Proprietor

An individual who owns and operates a business alone, without forming a corporation or a partnership.

Automatically

Occurring or operating without explicit intervention, as in processes designed to happen without human initiation.

Business Profits

Business Profits represent the excess of revenues over the expenses of running a business, indicating the financial success and viability of the business operations.