Compound Option. A project requires two sequential investments, each of which takes time to implement, before the project cash flows are generated.

This is a compound option, because it is an option to make the phase 1 investment on top of an option to make the phase 2 investment. The phase 1 investment cost is $48.0 million and takes 2 periods to implement. The phase 2 investment cost is $87.0 million and takes 1 period to implement. After both investments have been made and implemented, the project will generate cash flows whose present value now is $183 million. This static cash flow value will fluctuate in the future with a standard deviation of 71.0%. The riskfree rate is 0.00%, The project is only available for 4.3 years and an 8 period binomial model will be used. When should the phase 1 investment be made? When should the phase 2 investment be made? What is the static project value? What is the flexible project value? What is the value of the compound option?