risk free rate: 5% Dividend yield: 10% Exercise price: 50 million Current value: 45 million Volatility: 20% Volatility ^2: .0400 NPV: (5 million)

PROBLEM 12-1 Given Risk free rate Dividend yield Exercise price (I) Current value (V) Volatility Volatility ^2 NPV $ $ $ 5% 10% 50,000,000 45,000,000 20% 0.0400 (5,000,000) The right to develop the casino can be thought of as a American Call Option with infinite life. Immediate exercise of this option results in a negative NPV (-50 m + 45 m = -5 million). However, the real estate development option has a value of $3.317 million because of the inherent uncertainty in the prospects of the casino industry in that region. This uncertainty suggest that it may be worth waiting. Solution Call Option Value V* Call (Infinite life option) NPV* Casino Development Option Value Critical Value Critical NPV value Solution Legend = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output