Question
. The Mark II investment is double the scale of the Mark I (note the expected rapid growth of the industry). Investment required is $925
| . | The Mark II investment is double the scale of the Mark I (note the expected rapid growth of the industry). Investment required is $925 million (the exercise price), which is taken as fixed. |
| 3. | Forecasted cash inflows of the Mark II are also double those of the Mark I, with present value of $832 million in 1985 and 832/(1.2)3 = $481 million in 1982. |
| 4. | The future value of the Mark II cash flows is highly uncertain. This value evolves as a stock price does with a standard deviation of 40% per year. (Many high-technology stocks have standard deviations higher than 40%.) |
| the interest is 10% the decision to invest is in 3 years, in 1985. How does the value in 1982 of the option to invest in the Mark II change if the investment required for the MArk II is 825 million (vs 925 million)? How does the value of the Mark II change if the present value in 1982 is 525 million (vs 481 million)? |
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