Options Pricing Analysis (Worksheet 2) The options pricing analysis applies real options theory to the evaluation of an IT project. Suppose that SAP, sensing some hesitation on Whirlpool's part, makes the following offer. Instead of committing to the SAP project in total, SAP proposes to management that Whirlpool implement 6 to 8 modules of the entire system at a plant in the UK. The software company and Whirlpool's IT staff working together figure the total cost of this effort including payment to SAP, Whirlpool staff time and consultants, at $4 million for 1999. At the end of this pilot test, Whirlpool would decide whether or not to proceed with full scale implementation of SAP in all four European regions. Just as with the earlier analysis, we have to make some assumptions. Worksheet 2 uses the data from worksheet 1 to restate the costs and benefits for the option which involves only the South, Central and Northern regions. On worksheet 2, the analysis uses the Black Scholes options pricing model (0PM) to calculate the value of this option to make a decision at the end of a pilot test in the West. For a real option, X in the OPM formula is the expected revenue from the project, and c, the exercise price, is the IT investment required for the SAP project. Please answer the following questions about the OPM analysis: 7. What are you buying an option to do