Please answer the following. Show explanations as well.

MindTap - Cengage Learning - Microsoft Edge https:/g.cengage.com/staticb/ui/evo/index.html?deploymentld=583472314213865620565989397&elSBN=978133739512 MINDTAP 337395120&id=323590500&snapshotld=84037 From Cengage Module 14: Assignment - Real Options Q Sea 3. Estimating the inputs using the Black-Scholes option pricing model in the option analysis of the investment timing option Aa Aa Option analysis involves gathering significant amounts of information, synthesizing the data, and using the data in models applied in option analysis Consider the case of RTE Com Inc. : RTE Com Inc. is considering a project for a new cloud-based online storage system for companies and individuals to back up their data. The cost of the project is $55 million, but the future cash flows depend on how this new cloud-based online storage will compete with existing companies that offer online data backup. The company believes that this project has a strong selling feature but is uncertain that it would earn cash flows as projected. The team proposing this project has come up with the following data: Demand Probability High Annual Cash Flow 0.40 Average 0.40 $50 million Low $35 million 0.20 Project's cost of capital $15 million Life of project 17.00% 52-week Treasury note Three years 5% O Type here to search e O X ? # 2 3 $ % & 4 5 8 Q W E RTap Cengage Learning . Microsoft Edge tips / ng . cengage . com / static / b / ui / evo / index . html deploymentid = 583472314213865620565989397 Bel SBN - 978 337 395 120 Blit = 32359050 0 8snapshotid - 81027 4 MINDTA Q sear odule 14 : Assignment - Real Options he data backup The company believ roject has come up with the following data es that this project has a strong selling feature but is uncertain that it would earn cash flows as projected . The team proposing this Probability Annual Cash Flow $50 million $35 million Project's cost of capital Life of project Three years 52 - week Treasury note The project team also noted that the company has an option to wait for one year in order to see its competitors positions and observ responds . This will help in getting more information a how the market mation about market demand and in figuring out which set of cash flows will occur Analysts used different approaches to evaluate the project , but the management team insists that the Black - Scholes option pricing model ( OPM ) will help them make a more informed decision . The model requires five inpu price , ( 4 ) the current price of the stock , and ( 5 ) the variance Ve inputs : ( 1 ) the risk- free rate , ( 2 ) the time until the option expires , ( 3 ) the strike Fiance of the stock's rate of return You need to calculate both the value of the underlying ass current value of the project will be the present value of its expected cash flow at and its rate of return . For RTE Com Inc . , the underlying asset is the project itself . The Type here to search L SEE is LLLLdTap - - Cengage Learning - Microsoft Edge https:/g.cengage.com/staticb/ui/evo/index.html?deploym eploymentld=583472314213865620565989397&elSBN=9781337395120&id=323590500&snapshotld=84037 MINDTAP From Cengage Q sea lodule 14: Assignment - Real Options Based on the data given, calculate the value of the project, its return, and the standard deviation of the returns (using the direct method) if the company decides to wait for a year. (Cash flow values in the table are in millions.) Return= (PV Cash Flows1 - PV PV Cash Cash PV Cash Probability flowso) / PV Probability Now: Yr 0 Pj Yr 1 Yr 2 Yr 3 Yr 4 (Pj) x (Pj) x PV High flows (t=1) 0.40 flows (t=0) $50 $50 $50 Cash flowso Return Cash flows Average 0.40 $35 $35 $35 Low 0.20 $15 $15 Expected return (t=1): Standard deviation of returns: Expected Value of PVs (t=1): Expected Value of PVs (t=0): Analysts will use these values in the Black-Scholes model, which is represented by the following formula: V = P[N(d1)] - Xe-rRFt[N(dz)] Based on the data collected and results from the calculations, estimate the input values to be used in the Black-Scholes OPM: O Type here to search X ? 101 3 5lindTap - Cengage Learning - Microsoft Edge https:/g.cengage.com/staticb/ui/evo/index.html?dep 4213865620565 MINDTAP 0565989397&elSBN=9781337395120&id=323590500&snapshotld From Cengage Module 14: Assignment - Real Options Expecteu value or UI PVS (L-1): Expected Value of PVs (t=0): Analysts will use these values in the Black-Scholes model, which is represented by the following formula: V = P[N(d1)] - Xe-rRFt[N(d2) ] Based on the data collected and results from the calculations, estimate the input values to be used in the Black-Scholes OPM: IRF = Risk-Free Interest Rate = Time until Option Expires Cost to Implement the Project = Current Value of the Project 52 N(d1) = Variance of the Project's Rate of Return N(d2) = Cumulative Normal Distribution Function of di = = Cumulative Normal Distribution Function of d2 = N (di - N ( {In ( + [rRF + (02/2)]} / (ot1/2)) Flash Player WIN 31, 0,0,153 Q3 3.34 @ 2013 Cengage Learn d. 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