Making the initial investment will provide the company with the expertise that will enable it to make an investment of $184 million in 4 years time, which prospectively will generate five years of cash flows at $75 million a year. In evaluating the option of a follow-on investment opportunity, the firm is using the Black-Scholes option pricing approach. Assume the value of the discounted cash flows evolve with a standard deviation of 40%, and the risk-free rate is 8 percent? Also, assume the required rate of return on the follow-on investment is 20 percent.

In applying the B-S formula, how much is the asset value (S)?

a. 100.48 mil

b. 108.17 mil

c. 157.61 mil

d. 184 mil

e. 224.30 mil

1. In applying the B-S formula, how much is exercise price (X)?

		a. 75 mil
		b. 150 mil
		c. 165 mil
		d. 184 mil
		375 mil