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A project with an up-front cost at t=0 of $1500 is being considered by Nationwide Pharmaceutical Corporation (NPC). (All dollars in this problem are in thousands.) The project's subsequent cash flows are critically dependent on whether a competitor's product is approved by the Food and Drug Administration. If the FDA rejects the competitive product, NPC's product will have high sales and cash flows, but if the competitive product is approved, that will negatively impact NPC. There is a 75% chance that the competitive product will be rejected, in which case NPC's expected cash flows will be $500 at the end of each of the next seven years (t = 1 to 7). There is a 25% chance that the competitor's product will be approved, in which case the expected cash flows will be only $25 at the end of each of the next seven years (t = 1 to 7). NPC will know for sure one year from today whether the competitor's product has been approved. WACC is 10%. NPC is considering whether to make the investment today or to wait a year to find out about the FDA's decision. If it waits a year, the project's up-front cost at t - 1 will remain at $1,500, the subsequent cash flows will remain at $500 per year if the competitor's product is rejected and $25 per year if the alternative product is approved. However, if NPC decides to wait, due to the patent expiration, the subsequent cash flows will be received only for six years (t = 2 ... 7). Assuming that the risk free rate is 6% and the variance of project's returns is 15%, what is the Black and Scholes Value of this investment timing option? (Show calculations for P, dl, d2, and what excel formula you used to look up N(dl) and N(2) Answers: P=$1,509.49 N(dl)=0.6424 N(D2)=0.4910 V=$275.24 A project with an up-front cost at t=0 of $1500 is being considered by Nationwide Pharmaceutical Corporation (NPC). (All dollars in this problem are in thousands.) The project's subsequent cash flows are critically dependent on whether a competitor's product is approved by the Food and Drug Administration. If the FDA rejects the competitive product, NPC's product will have high sales and cash flows, but if the competitive product is approved, that will negatively impact NPC. There is a 75% chance that the competitive product will be rejected, in which case NPC's expected cash flows will be $500 at the end of each of the next seven years (t = 1 to 7). There is a 25% chance that the competitor's product will be approved, in which case the expected cash flows will be only $25 at the end of each of the next seven years (t = 1 to 7). NPC will know for sure one year from today whether the competitor's product has been approved. WACC is 10%. NPC is considering whether to make the investment today or to wait a year to find out about the FDA's decision. If it waits a year, the project's up-front cost at t - 1 will remain at $1,500, the subsequent cash flows will remain at $500 per year if the competitor's product is rejected and $25 per year if the alternative product is approved. However, if NPC decides to wait, due to the patent expiration, the subsequent cash flows will be received only for six years (t = 2 ... 7). Assuming that the risk free rate is 6% and the variance of project's returns is 15%, what is the Black and Scholes Value of this investment timing option? (Show calculations for P, dl, d2, and what excel formula you used to look up N(dl) and N(2) Answers: P=$1,509.49 N(dl)=0.6424 N(D2)=0.4910 V=$275.24