Opening the new marketing office in Brazil will require an initial investment of $4.00 million. According to research on Brazil's mobile technology infrastructure, Ana noted there is a 60% probability that the country's mobile connectivity will be sufficient to generate additional advertising cash flows of $6.00 million per year for the company for the next five years. Alternatively, there is a 40% chance that Brazil's mobile Internet connectivity will be insufficient to support Blue Gorilla's desired growth in Brazil. In this case, the company expects to generate additional net advertising-related annual cash flows of only $2.00 million for the next five years The project's expected cost of capital is 11.00 %, and the risk-free rate is 4%. The project's WACC should be used to discount all cash flows. Given this information, the project's expected net present value (NPV) without the consideration of the growth option is (Note: Round all calculations to two decimal places.) After further research, Ana added a few more details to her proposal: If Brazil's Internet connectivity is good, then at the end of Year 3, Blue Gorilla should consider investing $3.00 million to purchase an existing Brazilian marketing firm and creating a new subsidiary. The new subsidiary is expected to generate $2.40 million of additional annual cash flows in years 4 and year 5 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 3 or earn the expected additional advertising-related cash flows Based on Ana's additional information, use the decision tree analysis to caiculate the NPV of the profect 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 wants to use the the Black-Scholes option pricing model (OPM) to determine the value of the growth option. To do this, sh Lastly, Ana has collected and computed the values for several additional variables, and has given you the Black-Scholes OPM equation for the valuation of an option (V): V (Px N (ds)) - (Xxetx N (d2) where, Ch 14: Assignment- Real Options N(d,) and N(d,) = estimates of the variance of the project's expected return X the option's strike price, which is the cost of purchasing the Brazilian firm that will become the Blue Gorilla's subsidiary e the mathematical constant equal to 2.718281828459045235360, which can be truncated and rounded to 2.7183 rRF the market's risk-free rate until the option expires, which, in this situation, is assumed to be the end of third year, when the potential purchase of tthe time subsidiary would take place the According to Ana, these variables should assume the following values Variable Value Project's cost of capital 11.00% Current value of the delayed investment (P) 0.7573 N(d,), as estimated by Ana 0.7082 N(d,), as estimated by Ana Delayed investment's strike price (X) 2.7183 Mathematical constante Risk-fiee rate (txe) 0.04 Time until the option expires (t) (Note: Round all Given these values, the estimated value of Blue Gorilla's growth option using the Black-Scholes OPM (V) is calculations to two decimal places.)
