Unformatted text preview: = $2.514 million. 13-8 P = PV as of time zero of all expected future cash flows if the project is repeated starting in year 2. Note it includes both the good cash flows and the bad cash flows since as of now, we don’t know which outcome will result, and P excludes the $20,000 investment in the franchise. 0 1 2 3 4 40% Prob . | | | | | Good 25,000 25,000 Bad | | | | | 60% Prob. 5,000 5,000 EPV of cash flows (as of time 0) = 35,858(0.40) + 7,172(0.60) = $18,646 = P. The strike price, X, is the cost to extend the franchise at the end of year 2, and is $20,000. The time to expiration is the time you decide whether or not to extend the franchise, and r = 10%...
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- Spring '08
- Options, Strike price, Black–Scholes