Based on discussions with lawyers, there is a 50% chance that the tax would not be imposed, in which case the project would generate a cash flow of $6.7 million. If a financial services tax is imposed the project would generate a cash flow of $1.0 million. Lesnor Co. now has the option of knowing about the tax situation before it commits to the project, Lesnor's management decides to wait for a year before they make a decision on launching the project. However, Jesse mentions that the cash flow estimations for the project will remain valid only for the next five years. (For valuation purposes, the project has the same and date even with the option of walting.) In the meantime, the manngers decide to invest $5.0 million in securities for one year, which is expected to generate a rate of retum equal to the project's cost of capital. Based on the information that Jesse submitted in his report, calculate the values in the following table. Use the WACC to discount all cash flows (Note: Do not round Intermediate calculations.) Value NPV of the project after one year 58.19 million Option value of waiting $3.61 million Using the Black-Scholes option pricing model (OPM), Jesse takes his research a step further and calculates more variables to find the value of the option of waiting for one year to accept or reject the project. He uses (d) - 0.9815, (d) - 0.9325, and 2.7183 as the approximate value of e. 11 Jesse uses the Black-Scholes OPM, what will be the value of the option of walting for one year? (Note: Do not round intermediate calculations.) $5,61 million $10.43 million 59.62 million 58.02 million Suppose a technical glitch in the trading systems in the stock markets led to several erroneous trades. Soon after, Lesnor Co, a professional training company, came up with the idea of developing a new division that would teach securities traders to communicate by using an old style of hand language on the trading floor, which would help revive that dying language. A young product development employee, Jesse, proposed this idea and also submitted the following details about the project: . The division would need an initial investment of $5.0 milion Jesse expects that this division will bring in an additional $4 4 million at the end of each of the next five years, . The project's cost of capital is 10%, and the risk-free rate is 4%. The WACC is used to discount all cash flows. Based on the given information, what is the project's expected net present value (NPV)? (Note: Do not found intermediate calculations) $12.85 million O $11.68 million 39.34 million $17.52 million Aner further research, Jeuse added a few more details about the project to the proposal. When Jesse submitted the proposal, he again included the probability of the project soccer based on whether a financial services tax would be imposed on the revenues from the project for stock broker training Based on discussion with lawyers, there is a 60% chance that the tax would not be imposed, in which case the project would generate a cash flow of $6.7 million. It financial services tak is impored, the project would generate a cash flow of $1.0 millon. Lesnor Co now has the option of knowing about the tax situation before it commits to the project Lesnor's management decides to wait for a year before they make a decision on launching the project. However, Jesse mentions that the cash flow estimations for the project will remain valid only for the next five years. (For valuation purposes, the project has the same and date even with the option of waiting to the meantime, the managers decide to invest $5.0 million in securities for one year, which is expected to generate a rate of
