1. PEXFLY PROJECT:PEXFLY PROJECT:
A dream of solo flightA dream of solo flight
Presented by
Artur Aiguzhinov
& Tracy Miedema

2. Situation Analysis of
Helicopters Unlimited
 Financially sound corporation
 New product
 Inherent risks
 Staged entry
 Decision tree

3. Real Options Decision Tree
Stage 1
Stage 2
Stop
Low Demand (LD)
High Demand (HD)
Stop
Stop
Stage 3
Stage 3
LD
LD
HD
HD
20%
LD
80%
H
D
70%
HD
10%
30%
60%
10%
30%
60%
1
2
3
4
5
6
7
LD – Low Demand
HD – High Demand
30%
LD

4. Land Option Decision
Cost of capital
Periods 0 1 2
Years 1999 2000 2001
Alternative 1(purchase option) (100,000) (1,300,000)
PV (Alt.1) (900,965)
Total Cost PV (Alt.1) (1,000,965)
Alternative 2(don't purchase option) 0 (1,500,000)
Total Cost PV (Alt. 2) (1,039,575)
13%
The Military Helicopter Division should purchase the option to
buy the land at a locked-in price of $1,300,000.

5. Real Options Decision Tree
Stage 1
Stage 2
Stop
Low Demand (LD)
High Demand (HD)
Stop
Stop
Stage 3
Stage 3
LD
LD
HD
HD
20%
LD
80%
H
D
70%
HD
10%
30%
60%
10%
30%
60%
1
2
3
4
5
6
7
LD – Low Demand
HD – High Demand
30%
LD
0.2
0.024
0.072
0.144
0.056
0.168
0.336

6. Pexfly Project Value Assessment
Branches NPV
Joint
Probabilities Weighted NPV IRR Weighted IRR MIRR Weighted MIRR
1 (4,683,217) 0.200 (936,643)
2 (4,508,753) 0.024 (108,210) 9.44% 0.23% 11.06% 0.27%
3 (6,874,615) 0.072 (494,972) 9.30% 0.67% 11.28% 0.81%
4 3,043,705 0.144 438,294 14.31% 2.06% 13.67% 1.97%
5 24,510,799 0.056 1,372,605 26.59% 1.49% 19.35% 1.08%
6 17,561,020 0.168 2,950,251 21.61% 3.63% 16.27% 2.73%
7 27,479,341 0.336 9,233,059 24.31% 8.17% 17.72% 5.95%
Total 56,528,280.37 1.00 12,454,382.56 16.24% 12.82%
At this point the Pexfly Project may be accepted because
NPV is positive.

7. Project Standard Deviation
 The Pexfly Project standard deviation is
$13,916,572. The Coefficient of Variation is
1.12. Since the firm’s average project has a
CV of NPV in a range of 0.5 to 0.75, this
project is classified as a high-risk project.

8. Pexfly Project Value Assessment
Calculations
Branches NPV
Joint
Probabilities Weighted NPV IRR Weighted IRR MIRR Weighted MIRR
1 (4,683,217) 0.200 (936,643)
2 (4,508,753) 0.024 (108,210) 9.44% 0.23% 11.06% 0.27%
3 (6,874,615) 0.072 (494,972) 9.30% 0.67% 11.28% 0.81%
4 3,043,705 0.144 438,294 14.31% 2.06% 13.67% 1.97%
5 24,510,799 0.056 1,372,605 26.59% 1.49% 19.35% 1.08%
6 17,561,020 0.168 2,950,251 21.61% 3.63% 16.27% 2.73%
7 27,479,341 0.336 9,233,059 24.31% 8.17% 17.72% 5.95%
Total 56,528,280.37 1.00 12,454,382.56 16.24% 12.82%
Excel

9. Risk-Adjusted Rate
Branches NPV Probabilities Weighted NPV
1 (4,533,294) 0.20 (906,659)
2 (7,189,240) 0.02 (172,542)
3 (10,368,220) 0.07 (746,512)
4 (3,237,864) 0.14 (466,252)
5 16,414,045 0.06 919,187
6 9,614,130 0.17 1,615,174
7 16,744,486 0.34 5,626,147
16% NPV 17,444,044 5,868,543
13 %NPV 56,528,280 12,454,383
COST OF CAPITAL 16%
A cost of capital increase of 3% results in
approx. 50% decrease in NPV

10. Sensitivity Analysis
How does an incremental increase by 5% in
variable costs effect the NPV of the Pexfly
Project?
How does an incremental change of 10% in
price effect the NPV of the Pexfly Project?
Excel

11. Monte Carlo Simulation
This type of analysis ties together sensitivities
and input probability distributions
This simulation will include 3000 iterations
per run of the following variables:
-unit price
-unit sales per year
-sales growth rate

12. Real Options Decision Tree
Stage 1
Stage 2
Stop
Low Demand (LD)
High Demand (HD)
Stop
Stop
Stage 3
Stage 3
LD
LD
HD
HD
20%
80%
30%
70%
10%
30%
60%
10%
30%
60%
1
2
3
4
5
6
7
LD – Low Demand
HD – High Demand

13. Full Tree NPV
Branch NPV Probabilities Weighted NPV
1 (4,683,217) 0.20 (936,643)
2 (4,508,753) 0.02 (108,210)
3 (6,874,615) 0.07 (494,972)
4 3,043,705 0.14 438,294
5 24,510,799 0.06 1,372,605
6 17,561,020 0.17 2,950,251
7 27,479,341 0.34 9,233,059
56,528,280 1 12,454,383

14. Real Options Decision Tree
w/out branches 3, 4, 5
Stage 1
Stage 2
Stop
Stop
Stage 3
LD
HD
20%
LD
80%
H
D
30%
LD
70%
HD
40%
60%
1
2
6
7
LD – Low Demand
HD – High Demand

15. NPV w/ Branches 3, 4, & 5
“pruned” from the decision tree
Branch
Full Tree
Weighted
NPV NPV (pruned) Probabilities
Weighted NPV
(w/ 3,4,5,
pruned)
1 (936,643) (4,683,217) 0.200 (936,643)
2 (108,210) (4,508,753) 0.240 (1,082,101)
3 (494,972) 0 0.000 0
4 438,294 0 0.000 0
5 1,372,605 0 0.000 0
6 2,950,251 17,561,020 0.224 3,933,669
7 9,233,059 27,479,341 0.336 9,233,059
12,454,383 35,848,391.44 1.00 11,147,983.06

16. Real Options Decision Tree
w/out branches 3, 4
Stage 1
Stage 2
Stop
Stop
Stage 3
LD
HD
20%
LD
80%
H
D
30%
LD
70%
HD
30%
60%
1
2
6
7
LD – Low Demand
HD – High Demand
Stop 5

17. NPV w/ Branches 3 & 4
“pruned” from the decision tree
Branch Weighted NPV
Weighted
NPV (w/
3,4,5, pruned)
NPV (w/ 3 &
4 pruned)
Probabilities
Weighted NPV
(w/ 3 & 4
pruned)
1 (936,643) (936,643) (4,683,217) 0.200 (936,643)
2 (108,210) (1,082,101) (4,508,753) 0.024 (108,210)
3 (494,972) 0 (6,874,615) 0.000 0
4 438,294 0 3,043,705 0.000 0
5 1,372,605 0 24,510,799 0.056 1,372,605
6 2,950,251 3,933,669 17,561,020 0.168 2,950,251
7 9,233,059 9,233,059 27,479,341 0.336 9,233,059
12,454,382.56 11,147,984 56,528,280 1 12,511,061.28

18. Conclusions
 Pexfly is a high risk project
 Investors should demand a higher return on
investment for tolerating this level of risk
 The decision to go forward with each stage
of Pexfly will ultimately be determined by
1) the proportion of the project financially to
corporation as a whole
2) the corporation’s level of risk aversion