Unformatted text preview: expected NPV of $4.61 million, but implementing immediately means we give up the option to wait, which is worth $11.42 million. f. Use a financial option pricing model to estimate the value of the investment timing option. Answer: The option to wait resembles a financial call option-- we get to “buy” the project for $70 million in one year if value of project in one year is greater than $70 million. This is like a call option with a strike price of $70 million and an expiration date of one year. X = Strike Price = Cost Of Implement Project = $70 Million. R RF = Risk-Free Rate = 6%. T = Time To Maturity = 1 year. P = Current Price Of Stock = Current Value Of The Project’s Future Cash Flows. σ 2 = Variance Of Stock Return = Variance Of Project’s Rate Of Return....
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This note was uploaded on 07/13/2011 for the course FIN 4414 taught by Professor Staff during the Spring '08 term at University of Florida.
- Spring '08