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Use the following assumptions for valuing the option to invest in the Mark II microcomputer. The decision to invest in the Mark II must be
Use the following assumptions for valuing the option to invest in the Mark II microcomputer. The decision to invest in the Mark II must be made after three years, in 1985. 2. The Mark II investment is double the scale of the Mark I (note the expected rapid growth of the industry). Investment required is $980 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 $887 million in 1985 and 887I(1.2)^3 = $513 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%.) 5. The annual interest rate is 11%. a. 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 $880 million (vs. $980 million)?(Enter your answer in millions. Do not round intermediate calculations. Round your answer to 2 decimal places.) Call value $ million b. How does the value in 1982 of the option to invest in the Mark II change if the present value of the Mark II in 1982 is $580 million (vs. $513 million)? (Enter your answer in millions. Do not round intermediate calculations. Round your answer to 2 decimal places.) Call value $ million c. How does the value in 1982 of the option to invest in the Mark II change if the standard deviation of the Mark II's present value is only 25% (vs. 40%)? (Enter your answer in millions. Do not round intermediate calculations. Round your answer to 2 decimal places.) Call value $ million
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