A pharmaceutical company is considering whether to invest in a new biotech company

which is working on a new vaccine. It estimates that the cost of the biotech company is

-RM56 million. Purchasing the biotech company would provide the pharmaceutical

company with an option to own (if it wants to) a much advanced vaccine technology that

will be available in 4 years. If the pharmaceutical company does not purchase the biotech

company, it cannot own the advanced vaccine technology.

The advanced vaccine technology will require RM1.5 billion in cash four years from now.

Currently, the company estimates the net present value (NPV) of the advanced vaccine

technology to be RM597 million.

Assuming a risk free rate of 10% and that the annual volatility of the advanced vaccine

technology project to be 35%, should the company invest in the biotech company?