4. Investment timing option - Decision tree and the Black-Scholes valuation Aa Aa Suppose a technical glitch in the trading systems in the stock markets led to several "erroneous trades." Soon after, Lesnor Co., a professional training company, came up with the idea of developing a new division that would teach securities traders to communicate by using an old style of hand language on the trading floor, which would help revive that dying language. A young product development employee, Ryan, proposed this idea and also submitted the following details about the project: The division would need an initial investment of $4.0 million. Ryan expects that this division will bring in an additional $3.5 million at the end of each of the next five years. The project's cost of capital is 11%, and the risk-free rate is 4%. The weighted average cost of capital (WACC) is used to discount all cash flows. Based on the given information, what is the project's expected net present value (NPV)? $9.83 million O $8.94 million O $7.15 million O $13.41 million After further research, Ryan added a few more details about the project to the proposal. When Ryan submitted the proposal, he again included the probability of the project's success based on whether a financial services tax would be imposed on the revenues from the project for stock broker training. Based on discussions with lawyers, there is a 60% chance that the tax would not be imposed, in which case the project would generate a cash flow of $5.3 million. If a financial services tax is imposed, the project would generate a cash flow of $0.8 million. Lesnor Co. now has the option of knowing about the tax situation before it commits to the project. Lesnor's management decides to wait for a year before they make a decision on launching the project. However, Ryan mentions that the cash flow estimations for the project will remain valid only for the next five years. (For valuation purposes, the project has the same end date even with the option of waiting.) That is, the initial investment of $4.0 million will be made one year from now and the project will generate positive cash flows at the end of years 2, 3, 4, and 5. Based on the information that Ryan submitted in his report, calculate the NPV of the project today if the project is implemented in one year only if it is optimal to do so. Use the WACC to discount all cash flows. Using the Black-Scholes option pricing model (OPM), Ryan takes his research a step further and calculates more variables to find the value of the option of waiting for one year to accept or reject the project. He uses N(di) = 0.9815, N(dz) = 0.9325, and 2.7183 as the approximate value of e. If Ryan uses the Black-Scholes OPM, what will be the value of the option of waiting for one year? O $7.83 million O $7.22 million O $6.02 million O $4.21 million Based on the information that Ryan submitted in his report, calculate the NPV of the project today if the project is implemented in one year only if it is optimal to do so. Use the WACC to discount all cash flows. $3.52 million $6.73 million $1.80 million $2.82 million $option pricing model (OPM), Ryan takes his research a step further and calculates more Variables to Tha The value of the option of waiting for one vear to accept or reject the project. He uses Nd) =