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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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