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  3. you're planning to outsource 60% of your manufactu

You're planning to outsource 60% of your manufacturing function to a lower cost location sometime...

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Accounting

You're planning to outsource 60% of your manufacturing function to a lower cost location sometime in the next six months. Suppose the value of the plant today is 100m. Your plan is to economise 20m from outsourcing. Risk uncertainty in the operating environment is estimated by a semi-annual variance of 12.5% in cash flows. The risk-free rate of return is 4% per half annum. Use the binomial option pricing approach with a time step of three months to value the option to outsource operations. Is there an optimal time for taking such an action? Explain.

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