ABC Company has just been granted right to launch a new product. The PRESENT VALUE OF EXPECTED CASH FLOWS from launching such product right away is $40 million while the INITIAL COST for launching this product is $300 million. However, realising that the company is operating in a highly volatile industry, management are reluctant and wonder whether it is wise to wait and see how the industry will do in the near future. After 20 years, this product can be launched by anyone else in the industry. Assume that the decaying rate is constant throughout the 20-year period. The corresponding risk-free rate is 5% per year. The average variance (v2) in firm value for publicly traded peer companies is 0.49 (49%).

a. Calculate the real option to wait regarding the launching of this new product, FIND:

N(d1) =

N(d2) =

P = 400(million)

EX = 300(million)

Risk-free rate = 5% (0.05)

Variance2 = 49% (0.49)

Variance =

T = 20

Y = 0.05

b. Should ABC company wait and see or launch this product right away, based on your calculation on (a)?