You are analyzing a capital budgeting project. The project is expected to have a PV of cash inflows of $250 million and will cost $200 million today to take on. You have done a simulation of the project cash flows, and the simulation yields a variance in present value of cash inflows of 0.04. You have the rights to this project for the next 20 years. The 20-

year Treasury bond rate is 8%.

a. What is the value of the project based on traditional NPV?

b. What is the value of the project as an option?

c. Why are the two values different? What factor or factors determine the magnitude of this difference?