20 Question 4 Call Option for Expansion Project Narvik Ltd calculates that a new project it is considering will generate net cash inflows of $200 million but will cost $235 million to set up. However, for another $400 million dollars of outlay the project can later be expanded. The distribution of expected cash flows associated with this expansion currently has a mean of $350 million (present value), with a standard deviation of 40%. The time-frame for taking on the expansion is sometime within the next 10 years and the 10-year risk-free rate is 6 percent. Required: (1 mark) (a) Estimate the NPV of the initial project. Apr-200-235-340 - 24 (b) Estimate the value of the expansion project, using an appropriate version of the Black Scholes option pricing model. (12 marks) (c) What should Narvik do? Justify your answer from what you found in (a) and (b)