The Ramsync Brief Harvard Case Solution & Analysis

The Ramsync Brief Case Study Solution

Combine NPV of SDRAM and MRAM Opportunities

The given NPV of the SDRAM Project is $-33 million and of the MRAM Project is $ 148.07 million. On the basis of given data the combined NPV computed by the sum of both the NPVs equals to $115.07 million. As the combined NPV is positive, therefore the managers at the hedge fund are suggested to choose both of the projects.(Brigham, 2016)

Evaluation of the Parameters

The inputs used in the pricing model include Current Stock Price, the Exercise Price, Risk Free Rate of Return, Expected life, Volatility and the dividend yield. All these inputs are although independent to each other however a change in one input can impact the call option value. It could be seen by that at different strike prices the value of the call option is different.

Answers to the Questions of Management

MRAM Market Development Period

If the MRAM market would be developed in 3 rather than 5 years than it would be more beneficial for the hedge fund as the cash flows generated from MRAM Project would be received on earlier basis. However, the hedge fund would require substantial amount of investment on early basis to fund the cost of the project. On the basis of prior cash flows, we should do the project.

Increase in MRAM Projected Investment

If the projected investment would be doubled, than the project’s NPV would become negative and a negative NPV from both of the Projects implies that the hedge fund should not do the project.

Change in Volatility

If the actual volatility is greater than the projected volatility i.e. 65%, than the projected cash flows from the MRAM Project are more risky and can impact the overall NPV of the project. However, the project has a potential NPV at 65% volatility rate i.e. 148.07 million, which implies that even after the increase in volatility rate, the project would have a substantial NPV to justify its feasibility. Therefore, the managers should implement the project.

Justification of MRAM Valuation

Although, the MRAM market is much riskier than the SDRAM, but there are two points which can justify using same variables for MRAM discount rate as the ADRAM. The first point is that it has high growth potential as compare to the SRAM market. Another point to justify the valuation is that the 65% volatility can result in negative as well positive impact on the overall cash flows of the project. On the basis of above two points, the valuation of MRAM is justified.

Investment Required

If the managers at the hedge fund are going to consider both of the projects, they would require an initial investment of $900 million in the current year. After 5 years the managers would require an investment of $250 million and $ 265 million in the following year.

Conclusion

Although, the SDRAM Project has a negative NPV but the MRAM market which could be developed after five years has a positive NPV and ultimately justifies the feasibility of both of the projects with a combine NPV of $ 115 million. Along with it, the MRAM has a high market growth potential as compare to SDRAM. On the basis of the combined positive NPV and the high growth potential, the hedge fund should consider both of the projects.

Appendices

Appendix-1: Intrinsic Value and Time Value

Table-1: Intrinsic Value Call Option

Market Price= 25.79

Intrinsic Value of Option   
$20.00 $5.79In the money
$22.50 $3.29In the money
$25.00 $0.79In the money
$27.50 ($1.71)Out of the money
$30.00 ($4.21)Out of the money

Table-2: Intrinsic Value Put Option

Intrinsic Value of Option    
$20.00 ($5.79)Out of the money
$22.50 ($3.29)Out of the money
$25.00 ($0.79)Out of the money
$27.50 $1.71In the money
$30.00 $4.21In the money

Table-3: Time Value of Call Option

Time Value of Option  
$20.00 $0.09$1.37$2.44
$22.50 $0.32$2.24$3.51
$25.00 $1.06$3.41$4.80
$27.50 $2.48$4.85$6.29
$30.00 $4.47$6.53$7.95

Table-4: Time Value of Put Option

Time Value of Option   
$20.00 $5.83$6.80$7.58
$22.50 $3.32$5.13$6.07
$25.00 $1.78$3.75$4.78
$27.50 $0.70$2.65$3.69
$30.00 $0.18$1.79$2.77

Appendix-2: Call Option Value

Black-Scholes Option Pricing Model with Dividends
   
  Strike Price (June-04)
2022.52527.530
Current Stock Price25.7925.79 25.79     25.79     25.79
Exercise Price 20.0022.5025.00     27.50     30.00
Risk-Free Interest Rate6.00%6.00%6.00%6.00%6.00%
Expected Life of Option Years55555
Volatility65.0%65.0%65.0%65.0%65.0%
Dividend Yield0%0%0%0%0%
Call Option Value     $16.93 $16.28 $15.69 $15.14 $14.62

 

This is just a sample partical work. Please place the order on the website to get your own originally done case solution.

Other Similar Case Solutions like

The Ramsync Brief

Share This