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If Brazil's Internet connectivity is good, then at the end of Year 3 , Blue Gorilla should consider investing $ 3 . 0 0 million
If Brazil's Internet connectivity is good, then at the end of Year Blue Gorilla should consider investing $ million to purchase an Lastly, Natalia wants to use the the BlackScholes option pricing model OPM to determine the value of the growth option. To do this, she has
collected and computed the values for several additional variables, and has given you the BlackScholes OPM equation for the valuation of an option
:
where
the current, or a proxy, price of the value of the underlying asset which equals the present value of the delayed project's
forecasted future cash flows
and estimates of the variance of the project's expected return
the option's strike price, which is the cost of purchasing the Brazilian firm that will become the Blue Gorilla's subsidiary
the mathematical constant equal to dots, which can be truncated and rounded to
the market's riskfree rate
the time until the option expires, which, in this situation, is assumed to be the end of third year, when the potential purchase of
the subsidiary would take place According to Natalia, these variables should assume the following values:
Given these values, the estimated value of Blue Gorilla's growth option using the BlackScholes OPM V is
Note: Round all
calculations to two decimal places.
existing Brazilian marketing firm and creating a new subsidiary.
The new subsidiary is expected to generate $ million of additional annual cash flows in years and year
However, if the Internet connectivity in Brazil is inadequate to support Blue Gorilla's desired customer growth, then the company will
not invest the additional funds in year or earn the expected additional advertisingrelated cash flows.
Based on Natalia's additional information, use the decision tree analysis to calculate the NPV of the project including the growth option. Then, calculate
the value of the growth option by itself, and select the correct answers from the choices available in the following table. Remember to use the
project's cost of capital to discount all cash flows. Note: Round all answers to two decimal places.
Value
NPV of the project with growth option
Growth option value
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