Calculate the price of a 4-year chooser option. The static NPV is $500 000. The risk-free rate is 5% per year and the volatility is 30% per year. You plan to revise your decision after two years. That is to say use a two-step binomial method. The alternative options are given below:

Option 1: There is an opportunity to expand by 20% during the first two years. To undertake this expansion opportunity, it will cost $100 000. During the second two years there is a possibility to expand by 40%, which is assumed to increase the expansion cost by 100%.

Option 2: During the first two years, there is an opportunity to contract 20% of your capacity to a competitor and save costs up to $150 000. During the second two years this contraction possibility becomes 40% and the savings from it become $250 000.

Option 3: During the first two years, you may abandon the project for $200 000 of salvage value, which will decrease by $100 000 during the second two years.