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Consider the following investment opportunity. You have negotiated a deal with a major electric car manufacturer to open a dealership in your hometown. The contract
Consider the following investment opportunity. You have negotiated a deal with a major electric car manufacturer to open a dealership in your hometown. The contract terms specify that you must open the dealership either immediately or in exactly one year. If you do neither, you lose the right to open the dealership at all. You are wondering how much you should pay for this opportunity. It will cost you $ million to open the dealership, whether you open it now or in one year. If you open the dealership immediately, you expect it to generate $ in free cash flow the first year. While future cash flows will vary with consumer tastes and the state of the economy, on average, these cash flows are expected to grow at a rate of per year. The appropriate cost of capital for this investment is The riskfree interest rate is and the industry's volatility that you have calculated using comparable firms is Should you open the dealership today itself, or should you keep your real option and delay? Show detailed calculations for justifying the same. Also, provide an intuitive reason as to why you should wait.
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