1. Suppose a technical glitch in the trading systems in the stock markets led to several erroneous trades.

   Soon after, LEG Co., a professional training company, came up with the idea of developing a new division that would teach securities traders to communicate by using an old style of hand language on the trading floor, which would help revive that dying language.

   A young product development employee, Jesse, proposed this idea and also submitted the following details about the project:

   	The division would need an initial investment of $4.0 million.
   	Jesse expects that this division will bring in $3.5 million at the end of each of the next five years.
   	The projects cost of capital is 12%, and the risk-free rate is 4%. The WACC is used to discount all cash flows.

   1. Based on the given information, what is the projects net present value (NPV)? (Note: Do not round intermediate calculations.)

   b. After further research, Jesse added a few more details about the project to the proposal.

   There is a 60% chance that the tax would not be imposed, in which case the project would generate a cash flow of $5.3 million. If a financial services tax is imposed, the project would generate a cash flow of $0.8 million.

   LEG has the option to wait for a year before they make a decision on launching the project. However, Jesse mentions that the cash flow estimations for the project will remain valid only for the next five years. (For valuation purposes, the project has the same end date even with the option of waiting.)

   Use the decision tree analysis, what is the projects expected NPV?

   Use the WACC to discount all cash flows. (Note: Do not round intermediate calculations.)

   c. If Black-Sholes formula were used to estimate the real option, what is the value of P in the formula?