b) If the demand is high, NPC has the opportunity to rerun the project restarting at the end of year 7. Find the NPV and CV of the project with the growth option. Problem 2. Real Options. (14 points) A project with an up-front costat -0 of 51,600 is being considered by NPC. The project's subsequent cash flows are dependent on market demand for the product. If the market responds well, NPC will have high sales and cash flows, but if the demand is low, that will negatively impact NPC. There is a 75% chance that the demand is high, in which case NPC's expected cash flows will be $600 at the end of each of the next seven years (t-1 to 7). There is a 25% chance that the demand is low, in which case the expected cash flows will be only $25 at the end of each of the next seven years (t-1 to 7). All cash flows are discounted at 10% -6%. a) Find the NPV and CV of the project today b) Ir the demand is high, NPC has the opportunity to rerun the project restarting at the end of year 7. Find the NPV and CV of the project with the growth option c) Calculate the value of the growth option using Black and Scholes option pricing model, assuming varianer of 14% resulting in N(d) 0.7179; N(d)-0.3397. Show calculations for P, show all work. b) If the demand is high, NPC has the opportunity to rerun the project restarting at the end of year 7. Find the NPV and CV of the project with the growth option. Problem 2. Real Options. (14 points) A project with an up-front costat -0 of 51,600 is being considered by NPC. The project's subsequent cash flows are dependent on market demand for the product. If the market responds well, NPC will have high sales and cash flows, but if the demand is low, that will negatively impact NPC. There is a 75% chance that the demand is high, in which case NPC's expected cash flows will be $600 at the end of each of the next seven years (t-1 to 7). There is a 25% chance that the demand is low, in which case the expected cash flows will be only $25 at the end of each of the next seven years (t-1 to 7). All cash flows are discounted at 10% -6%. a) Find the NPV and CV of the project today b) Ir the demand is high, NPC has the opportunity to rerun the project restarting at the end of year 7. Find the NPV and CV of the project with the growth option c) Calculate the value of the growth option using Black and Scholes option pricing model, assuming varianer of 14% resulting in N(d) 0.7179; N(d)-0.3397. Show calculations for P, show all work
