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Financial
Modeling
Lecture 2
Kaushank Khandwala

Problem
MBD Energy is a green energy firm that wants to invest in a project having a three-year
life and a terminal value that depends on the cash flow in the final quarter of the third
year.
There are only two sources of uncertainty: (1) the average quarterly growth rate of
revenue, and (2) variable cost as a percentage of revenue.

MBD Energy
Option 1)project manager has no flexibility to make decisions during the life
of the project. That is, once the project is run to the end of three years with
no expansion if successful, and no
abandonment if unsuccessful.
Option 2) to abandon the project if unfavourable circumstances occur. Begin
checking in the second quarter of Year 2, and abandon the project if three
consecutive quarters of negative cash flow occur.