Question
Calculate the price of a 2-year chooser option. The static NPV of the project is $1000 if the economy is booming with a probability, otherwise
Calculate the price of a 2-year chooser option. The static NPV of the project is $1000 if the economy is booming with a probability, otherwise the project is worth $500. The risk-free rate is 5% per year and the volatility is 40% per year. This project is embedded with three options that increase the managerial flexibility: First, there is an opportunity to expand by 50% the first year which will cost $200. The second year there is not any expansion opportunity. Second, there is an opportunity to contract 50% of your capacity, only the first year, and save costs up to $400. Third, the second year you may abandon the project for $600.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started