A project has expected cash flows with a present value of $75 million. The annual standard deviation of the project's returns is 35%. The company can delay the start of the project by 1 year to find out more about the demand for the product. If the company decides to go ahead with the project after 1 year, the company needs to invest $50 million. The risk-free rate is 5% (continuously compounded). What is the value of the option to delay (in $ million)?
A project has expected cash flows with a present value of $75 million. The annual standard deviation of the project's returns is 35%. The company can delay the start of the project by 1 year to find out more about the demand for the product. If the company decides to go ahead with the project after 1 year, the company needs to invest $50 million. The risk-free rate is 5% (continuously compounded). What is the value of the option to delay (in $ million)?
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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A project has expected cash flows with a
The company can delay the start of the project by 1 year to find out more about the demand for the product. If the company decides to go ahead with the project after 1 year, the company needs to invest $50 million.
The risk-free rate is 5% (continuously compounded).
What is the value of the option to delay (in $ million)?
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