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
You have a project valued at 200 that could increase or decrease by 25% per period for two periods. The project has three embedded options: 1. option to abandon at 190; 2. a contraction option with a strike of 50 with an 80% of original value; and 3. an expansion option with a strike of 70 with 130% of original value. The risk free rate is 5% and the WACC is 20%. What is the value of all the options combined? Plot your answer.
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