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Walmart is considering a new store in Queensland that requires and investment of$ 2 , 5 0 0 , 0 0 0 now. The store

Walmart is considering a new store in Queensland that requires and investment of$2,500,000 now. The store is expected to generate a present value cashflow of$2,000,000 from this investment. The standard deviation of expected cash flow is quiterisky at 30%. The ten year risk-free rate is currently at 5%. The current agreement allowsWalmart to close the store anytime in the next 10 years and sell the land for $350,000
a. Should Walmart accept or reject the investment opportunity after considering theabandonment option? Show the values of the various components of the Black &Scholes formula using excel spreadsheet
b. How would your decision change if Walmart has an option to expand the storeanytime in the next 10 years? The cost of expansion would be $1,500,000 and thebest estimation of the present value of this expansion is $1,200,000. The standarddeviation and risk-free rate will be the same as above. For part (b) assume that theoption to abandon' does not exist. Show the values of the various componentsof the Black & Scholes formula using excel spreadsheet

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