BTR Corp. is considering a project for a new cloud-based online storage system for companies and individuals to back up their data. The cost of the project is $55 million, but the future cash flows depend on how this new cloud-based online storage will compete with existing companies taht offer online data backup.

The company believes that this project has a strong selling feature but is uncertain that it woud earn cash flows as projected. The team proposing this project has come up with the following data:

Demand	Probability	Annual Cash Flow
High	0.40	$50 million
Average	0.40	$35 million
Low	0.20	$15 million
Project's cost of capital		18.00%
Life of project		3 years
52-week Treasury note		5%

The project team also noted that the company has an option to wait for one year in order to see its competitor's positions and observe how the market responds. This will help in getting more information about market demand and in figuring out which set of cash flows will occur.

Analysts used different approaches to evaluate the project, but the management team insists that the Black-Scholes option pricing model (OPM) will help them make a more informed decision. The model requires 5 inputs: 1. the risk free rate, 2. the time until the option expires, 3 the strike price 4. current price of the stock, which in this case would be a proxy for the value of the underlying asset, 5. the variance of the project's expected return.

You need to calculate both the value of the underlying asset in the project and it's rate of return. For BTR Corp., the underlying asset is the project itself. The current value fo the project will be the ________(present or future) value of its expected cash flows.

Based on the data given, calculate the value of the project, its return, and the standard deviation of the returns, using the direct method, if the company decides to wait a year. Cash flow values in the table are in millions. All the boxes with question marks need answers and the potential answers to each one are listed in the boxes. There was nothing in the original problem listed for year one, that is why it is blank.

Now: Yr0	Pj	Year 1	Year 2	Year 3	Year 4	PV Cash flows (t=1)	PV cash flows (t=0)	Returns = PV cash flows1 - PV cash flows0 / PV cash flows0	Probability (Pj) x Return	Probability (Pj) x PV cash flows1
High	0.40	-	$50	$50	$50	??? 92.13 76.10 108.71 35.00	??? 108.71 35.00 92.13 64.49	??? 59.45% 11.62% -52.17% 50.00%	??? -10.4340% 4.6480% 23.7800% 41.1000%	??? $5.528 $36.852 $43.484
Average	0.40	-	$35	$35	$35	??? 64.49 27.64 15.00 76.10	??? 76.10 9213 35.00 64.49	??? 59.45% -52.17% 15.00% 11.62%	??? -10.4340% 4.6480% 41.1000% 23.7800%	??? $36.852 $30.440 $25.796
Low	0.20	-	$15	$15	$15	??? 27.64 32.61 64.49 50.00	??? 32.61 27.64 92.13 15.00	??? -52.17% 35.00% 11.62% 59.45%	??? -10.4340% 4.6480% 41.1000% 23.7800%	??? $6.522 $36.852 $5.528
								Expected return (t=1):	??? 17.99% 43.43% 44.21% 48.35%
								Standard deviation of returns:	??? 41.10% 49.32% 39.05% 36.99%
								Expected value of PVs (t=1):	$57.95 $75.00 $80.45 $61.36
								Expected value of PVs (t=0)	??? $61.36 $75.00 $57.95 $68.18

Analysts will use these values in the Black-Scholes model. From the data collected and the results from the calculations, estimate the input values to be used in the Black-Scholes OPM:

Risk Free interest rate: a. 5% b. 10% c. 6% d. 18%

Time until option expires: a. 1 year b. 2 years c. 3 years d. 6 months

Cost to impoement the project: a. $15 million b. $35 million c. $18 million $55 million

Current value of the project: a. $61.36 b. $57.95 c. $75.00 d. $68.18

Variance of the project's rate of return: a. 16.88% b. 15.19% c. 39.05% d. 41.10%