Question
For the example covered in Notes pages 28-29, suppose we keep everything else the same but change the risk free rate from 5% to 8%.
For the example covered in Notes pages 28-29, suppose we keep everything else the same but change the risk free rate from 5% to 8%. Which of the following statement is NOT correct?
The risk-neutral probability for the binomial tree starting from year zero is 0.560. | ||
The risk-neutral probability for the binomial tree starting from year one in the down state is 0.4100; that for the binomial tree starting from year one in the up state is 0.6080. | ||
If in year one we are in the up state, the present value of future cash flows from the project will be $167.04 m. If in year one we are in the down state, the present value of future cash flows from the project will be $111.57 m. If the cost of expanding the project is $140 m, we would choose to expand only in the up state, but not in the down state. | ||
After taking into consideration of expanding the project in up state of year one, the present value (as of time 0) of the project is $165.09 m. |
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