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 $935 million, which is taken as fixed 3 Forecasted cash inflows of the Mark II have a present value in 1985 of $842 million and $487 million (842 1 2 3 487) 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 42 per year 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 $487 million with an exercise price of $935 million How does the value of the option to invest in the Mark II in 1982 change if a The investment required for the Mark II is $835 million (vs $935 million) (Do not round intermediate calculations Round your answer to 2 decimal places ) b The present value of the Mark II in 1982 is $535 million (vs $487 million) (Do not round intermediate calculations Round your answer to 2 decimal places ) c The standard deviation of the Mark II's present value is only 27 (vs 42 ) (Do not round intermediate calculations Round your answer to 2 decimal places )

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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

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 $935 million, which is taken as fixed.
3.	Forecasted cash inflows of the Mark II have a present value in 1985 of $842 million and $487 million (842 / 1.2³ = 487) 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 42% per year.
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 $487 million with an exercise price of $935 million.

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

a. The investment required for the Mark II is $835 million (vs. $935 million)? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

b. The present value of the Mark II in 1982 is $535 million (vs. $487 million)? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

c. The standard deviation of the Mark II's present value is only 27% (vs. 42%)? (Do not round intermediate calculations. Round your answer to 2 decimal places.)