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17. Diplomat.com is considering a project that has an up-front cost of $3 million and is expected to produce a cash flow of $575,000 at

17. Diplomat.com is considering a project that has an up-front cost of $3 million and is expected to

produce a cash flow of $575,000 at the end of each of the next 5 years. The project's cost of capital

is 16%. What is the project's net present value?

Answer: -$1,117,281.15

18. Refer to problem 17. If Diplomat goes ahead with this project today, it will obtain knowledge that will

give rise to additional opportunities 5 years from now (at t = 5). The company can decide at t = 5 whether

or not it wants to pursue these additional opportunities. Based on the best information available today,

there is a 40% probability that the outlook will be favorable, in which case the future investment

opportunity will have a net present value of $6 million at t = 5. There is a 60% probability that the outlook

will be unfavorable, in which case the future opportunity will have a net present value of -$2 million

(negative) at t = 5. Diplomat.com does not have to decide today whether it wants to pursue the additional

opportunity. Instead, it can wait to see what the outlook is. However, the company cannot pursue the

future opportunity unless it makes the $3 million investment today. What is the estimated net present

value of the project after consideration of the potential future opportunity

Answer: $25,390.09

19. Refer to problems 17 and 18. What is the value of the option to expand Diplomat.com's project

from the decision-tree analysis you have completed in problems 17 and 18?

20. Refer to problems 17 and 18. Next, we plan to use the Black-Scholes model to estimate the value of

this option to expand the project at t = 5. Calculate P = current stock price = PV as of t = 0 of all

expected future cash flows if the project is expanded at t = 5.

21. Refer to problem 20. Now use the Black-Scholes model to estimate the value of this option to

expand the project at t = 5. Use the P you calculated in problem 20, plus assume that the variance of

the project's rate of return is 40% and that the risk-free rate of return is 5%.

***I need help with 19, 20, and 21.

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