Assumptions 1. The decision to invest in the Mark II must be made after three years, in 1985. 2. The Mark II has an investment requirement of $930 million, which is taken as fixed. 3. Forecasted cash inflows of the Mark II have a present value in 1985 of $837 million and $484 million (837 / 1.23 - 484) 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 41% per year. 5. The annual interest rate is 114. Interpretation The opportunity to invest in the Mark II is a three-year call option on an asset worth $484 million with an exercise price of $930 million. How does the value of the option to invest in the Mark II in 1982 change it: a. The investment required for the Mark It is $830 million (vs. $930 million)? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Option value b. The present value of the Mark II in 1982 is $530 million (vs. $484 millon)? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Option value Assumptions 1. The decision to invest in the Mark II must be made after three years, in 1985. 2. The Mark II has an investment requirement of $930 million, which is taken as fixed. 3. Forecasted cash inflows of the Mark II have a present value in 1985 of $837 million and $484 million (837 / 1.23 - 484) 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 41% per year. 5. The annual interest rate is 114. Interpretation The opportunity to invest in the Mark II is a three-year call option on an asset worth $484 million with an exercise price of $930 million. How does the value of the option to invest in the Mark II in 1982 change it: a. The investment required for the Mark It is $830 million (vs. $930 million)? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Option value b. The present value of the Mark II in 1982 is $530 million (vs. $484 millon)? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Option value