Suppose that you have the option to invest in a wind farm with deterministic annual energy output normalised to 1 MWh. You will sell all of this electricity at an exogenous stochastic price at time t, P, (S/MWh), that follows a geometric Brownian motion (GBM), i.e. dP = aPdt+oPdz. As usual, a 20 is the annual growth rate, a > 0 is the annualised percentage volatility, and dz is the increment to a Wiener process. There are no operating costs for this wind farm, but the deterministic investment cost is I > 0 ($). The exogenous discount rate is p> a 20, and all cash flows and rates are in real terms. Assume that the option to invest is perpetual, and once the wind farm is adopted, it will last forever. (a) What is the expected value of the wind farm project, V(Po), at the initial price, Po> 0? Using the expression obtained for V(Po), what is the expected net present value (NPV) of the investment project under a now-or-never strategy, G(P)?

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