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12. Please return the cost of capital to 9%. Sigma squared is the variance in the rate of return of the project. The calculations for
12. Please return the cost of capital to 9%. Sigma squared is the variance in the rate of return of the project. The calculations for the variance are in the first table of worksheet 2. Determining sigma squared is one of the most challenging tasks in calculating the value of a real option. In this example, we suggest asking managers for their best and worst case estimates of the benefits, given the expected benefits taken from worksheet 1. Just above the table, there is a percentage number for the range surrounding the expected returns, which starts at 20%. This says that the worst estimate is 80% of the expected, and the best is 120% of the expected. a. What happens to the value of the option if you change the range from 20% to 10%? b. What happens to the value of the option if you change it to 30%? c. What do these changes say about the sensitivity of 0PM and its applicability to IT projects
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