0. In a very simplified world with 2 possible scenarios, a company is wondering if it should undertake a project immediately or wait one year to know more about its value. In one year, the project will be worth either 7/5 (upside scenario) or 5/7 (downside scenario) of its initial value.

   If it waits, it will of course miss out on the cash flows it could generate during the first year (assumed to be at the end of the year). Such cash flows, for both scenarios, are assumed to be 10% of the value of the project in one year.

   The cash outlay for the project (now or in one year) is $150 million. Its value today is $180 million (not taking into account the cash outlay).

   The risk-free rate is 6%. What would you advise the company to do?

   Hint 1: you need to compare the NPV of investing now (easy) with that of investing in one year. The following hints are here to help you do this. Hint 2: in other words, the problem is about comparing the NPV of investing now with the present value of the option to invest in the project in one year, with an exercise price of $150 million.

   Hint 3: calculate the total returns (in %) in the value of the project in both scenarios (the returns should take into account the cash flows generated during the first year plus the value of the project in one year). Hint 4: assess the hypothetical risk-neutral probability of each scenario.

   Hint 5: calculate the expected value of the payoffs in one year using the probability you just found and infer its present value.