4 Gasworks, Incorporated, has been approached to sell up to 4 million gallons of gasolinein three months at a price of $3.25 per gallon. Gasoline is currently selling on thewholesale market at $3.00 per gallon and has a standard deviation of 56 percent. If therisk-free rate is 7 percent per year, what is the value of this option? Use the two-statemodel to value the real option. (Do not round intermediate calculations and enter youranswer in dollars, not millions of dollars, rounded to 2 decimal places, e.g.,1,234,567.89.)Answer is complete but not entirely correct.$Value of contractCOLOU-3.13 x

An option is an agreement between two parties granting one the opportunity to buy or sell a security…

Answered: what is the value of this option?

Business

Finance

what is the value of this option?

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Question

Gasworks, Incorporated, has been approached to sell up to 4 million gallons of gasoline
in three months at a price of $3.25 per gallon. Gasoline is currently selling on the
wholesale market at $3.00 per gallon and has a standard deviation of 56 percent. If the
risk-free rate is 7 percent per year, what is the value of this option? Use the two-state
model to value the real option. (Do not round intermediate calculations and enter your
answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g.,
1,234,567.89.)
Answer is complete but not entirely correct.
$
Value of contract
COLOU
-3.13 x

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Question: Gasworks, Inc., has been approached to sell up to 2.4 million gallons of gasoline in three months at a price of $2.40 per gallon. Gasoline is currently selling on the wholesale market at $2.20 per gallon and has a standard deviation of 58 percent. If the risk-free rate is 3.5 percent per year, what is the value of this option? Use the two-state model to value the real option. (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.)
Brewster's is considering a project with a life of 5 years, an initial cost of $150,000, and a discount rate of 10 percent. The firm expects to sell 2,400 units a year at a cash flow per unit of $25. The firm will have the option to abandon this project after three years at which time it could sell the project for $40,000. At what level of sales should the firm be willing to abandon this project at the end of the third year?Answer in Excel Please
Brewster’s is considering a project with a 5-year life and an initial cost of $120,000. The discount rate for the project is 12 percent. The firm expects to sell 2,100 units a year at a cash flow per unit of $20. The firm will have the option to abandon this project after three years at which time it could sell the project for $50,000. At what level of sales should the firm be willing to abandon this project at the end of the third year?
Fabco, Inc., is considering the purchase of flow valves that will reduce annual operating costs by $10,000 per year for the next 12 years. Fabco’s MARR is 7%/yr. Using an internal rate of return approach, determine the maximum amount Fabco should be willing to pay for the valves.
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