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FRE Firm has a capital investment that requires an expenditure of $522.2 m and promises to return $52 m per year in perpetuity. In one

FRE Firm has a capital investment that requires an expenditure of $522.2 m and promises to return $52 m per year in perpetuity. In one year there are two possible outcomes a $56 m or $40 m per year in perpetuity. The risk free rate is 4% and the risky rate is 10%.


 A) What is the percentage increase in the upside state of the investment? 


B) What is the risk neutral probability of the up movement of the investment in the above problem?


C) What is the value of the project today if the firm waits one year to invest and the expenditure does not change? 


D) What is the value of waiting for this capital investment?


E) Suppose now that FRE Firm owns the project described above. In one year if it is not successful the project can be sold to CMP Firm for a price equal to the expenditure. What is the maximum value for which the project can be sold today to GRE Firm?

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