Question 3: Your company has an R&D project that can be modeled as a real option. There are 18 months before the option expires. Based on a DCF calculation, the value of the underlying asset today (So) is $125M. If we wish to exercise the option, we will need to invest $100M at the date of exercise. The volatility of the projects returns is given by o = 35%. The risk-free rate is 3.0%. a) Using Black-Scholes, what is the value of the real option? b) Suppose the company can spend $5M today in a patent that MAY open new markets for this potential R&D project. This is will likely increase volatility from 35% to 40%. Is this worth the $5M cost? c) The reason for the 18-month expiration in the original question was the actions of the company's largest competitor. In 18 months, the competitor will launch a competing product and we will be forced to act and exercise the option if In-the-Money. We have filed a lawsuit against the tent infringement - not because we think we will win, BUT rather, it will push back the competitor's plans from 18 months to 2 years. How much should we be willing to spend on the lawsuit? (Ignore taxes, AND ignore your work in part b)