Real option analysis can be used to alter the timing, scale, or other aspects of an investment in response to market conditions. Businesses face the dilemma of whether to invest in a project or abandon it if it does not add value to the firm. Real option analysis allow financial managers to determine the financial consequences of this flexibility and the value of the option.

Blue Ladybug Media Company, a social networking company, has seen triple$-$digit growth in its website's registrations over the past two years. Most of the website's subscribers live outside the United States, and the company is seeing a significant increase in the number of users from Brazil. As a result, Blue Ladybug is considering opening a marketing office in Brazil to expand its marketing efforts there. Management, however, is not sure if the Brazilian expansion via the opening of a subsidiary office will necessarily help the company grow and increase its value. Management's uncertainty is the result of the possibility that Brazil's Internet connectivity will be insufficient to support all of Blue Ladybug's forecasted growth.

One of Blue Ladybug's employees, Ana, who is originally from Brazil, conducted some preliminary market research and submitted the following details about the potential five$-$year project:

Opening the new marketing office in Brazil will require an initial investment of $$6\mathrm{.}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 $$9\mathrm{.}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 Ladybug's desired growth in Brazil. In this case, the company expects to generate additional net advertising$-$related annual cash flows of only $$3\mathrm{.}00$ million for the next five years.

The project's expected cost of capital is $14\mathrm{.}00\%,$ and the risk$-$free rate is $4\%.$ The project's WACC should be used to discount all cash flows.