Luther Industries Is Considering Launching a New Toy Just in Time

question 4

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 there is greater uncertainty about next year's demand.Launching the new toy 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:

Equilibrium Price

The price at which the quantity of goods demanded is equal to the quantity of goods supplied, resulting in a stable market condition.

Surpluses

Surpluses occur when the quantity of a good or service supplied exceeds the quantity demanded, often leading to a decrease in prices.

Market Prices

The current prices at which goods and services can be bought or sold in a marketplace.

Rationing Function

The process by which the market system allocates goods and services to consumers when supply is limited.