1. The decision to invest in the Mark II must be made after three years, in 1985. 2. The Mark II has an investment requirement of $945 million, which is taken as fixed. 3. Forecasted cash inflows of the Mark II have a present value in 1985 of $852 million and $493 million (852/ 1.23 493) in 1982. 4.The future value of the Mark II cash flows is highly uncertain. This value evolves as a stock price does with a standard deviation of 44% per year. 5. The annual interest rate is 8%. Interpretation. The opportunity to invest in the Mark II is a three-year call option on an asset worth $493 million with an exercise price of $945 million. How does the value of the option to invest in the Mark II in 1982 change if: a. The investment required for the Mark II is $845 million (vs. $945 million)? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Option value

1. The decision to invest in the Mark II must be made after three years, in 1985. 2. The Mark II has an investment requirement of $945 million, which is taken as fixed. 3. Forecasted cash inflows of the Mark II have a present value in 1985 of $852 million and $493 million (852/ 1.23 493) in 1982. 4.The future value of the Mark II cash flows is highly uncertain. This value evolves as a stock price does with a standard deviation of 44% per year. 5. The annual interest rate is 8%. Interpretation. The opportunity to invest in the Mark II is a three-year call option on an asset worth $493 million with an exercise price of $945 million. How does the value of the option to invest in the Mark II in 1982 change if: a. The investment required for the Mark II is $845 million (vs. $945 million)? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Option value

Financial And Managerial Accounting

15th Edition

ISBN:9781337902663

Author:WARREN, Carl S.

Publisher:WARREN, Carl S.

Chapter26: Capital Investment Analysis

Section: Chapter Questions

Problem 2MAD: Assume San Lucas Corporation in MAD 26-1 assigns the following probabilities to the estimated annual...

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