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Use decision tree analysis to determine the value of the investment timing option. Use the Black-Scholes Option Pricing (BSOP) model to estimate the value of
Use decision tree analysis to determine the value of the investment timing option.
Use the Black-Scholes Option Pricing (BSOP) model to estimate the value of the investment timing option. Specify the values of input variables used for your application of the BSOP. Explain in detail the procedure of estimating the risk of returns for the underlying asset of the real option.
Summary of key inputs | ||
Market value of bare land | $15,000,000.00 | |
Gross annual rental income | $600,000 | |
Tax rate | 28% | |
Set-up cost | $7,000,000 | |
Annual revenue | Probability | |
Low demand | 30% | $5,000,000 |
Medium demand | 40% | $9,000,000 |
High demand | 30% | $13,000,000 |
Variable costs | (% of revenue) | 65% |
Fixed costs | $2,500,000 | |
Cost of capital | 10% | |
Risk-free rate | 3% |
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