1.The decision to invest in the Mark II must be made after three years, in 1985.2.The Mark II has an investment requirement of$1,000 million, which is taken as fixed.3.Forecasted cash inflows of the Mark II have a present value in 1985 of $907 million and $525 (907 / 1.2³= 525) millionin 1982.4.The future value of the Mark II cash flows is highly uncertain. This value evolves as a stock price does with a standard deviation of 44% per year.5.The annual interest rate is 10%.

InterpretationThe opportunity to invest in the Mark II is a three-year call option on an asset worth $525 million with an exercise price of $1,000 million.

How does the value of the option to invest in the Mark II in 1982 change if:

a.The investment required for the Mark II is $900 million (vs. $1,000 million)?(Do not round intermediate calculations. Round your answer to 2 decimal places.)

Option value$

b.The present value of the Mark II is 1982 is $600 million (vs. $525 million)?(Do not round intermediate calculations. Round your answer to 2 decimal places.)

Option value$

c.The standard deviation of the Mark II's present value is only 29% (vs. 44%)?(Do not round intermediate calculations. Round your answer to 2 decimal places.)

Option value$