Assumptions

$1.$ The decision to invest in the Mark II must be made after three years, in $1985.$

$2.$ The Mark II investment is double the scale of the Mark I $($note the expected rapid growth of the industry$).$ Investment required is $$960$ million $($the exercise price$),$ which is taken as fixed.

$3.$ Forecasted cash inflows of the Mark II are also double those of the Mark I, with present value of $$867$ million in $1985$ and $867-$: $(1)3$raise to the power of $3=$ $$502$ million in $1982.$

$4.$ 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 $36\%$ per year. $($Many high$-$technology stocks have standard deviations higher than $36\%.)$

$5.$ The annual interest rate is $12\%.$

Interpretation

The opportunity to invest in the Mark II is a three$-$year call option on an asset worth $$502$ million with a $$960$ million exercise price.

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

The investment required for the Mark II is $$860$ million $($vs$.$ $$960$ million$)?$

The present value of the Mark II in $1982$ is $$560$ million $($vs$.$ $$502$ million$)?$

The standard deviation of the Mark II's present value is only $21\%($vs$.36\%)?$

Note: Do not round intermediate calculations. Round your answer to $2$ decimal places.