Zion Aviation Rates: Discount rate 6.0% Option Pricing: Risk-free rate 2.1% PV of Cap. Ex. (Yrs. 1-2) Scenario: No Real Options Maturity 3.0 Start 2 3 7 PV of NCF Cash from Operations 1.1 2.1 30 40 6.0 80 110 Risk free rate minus: Capital Expenditures 3.0 4.0 10 10 1 13 20 1 8 10 Volatility 25% = Net Cash Flow (NCF) BS calculations: Terminal Value 110 d1 #DIV/01 PV of NCF N(d1) #DIV/O! Scenario: Real Options d2 #DIV/OI Start 2 3 6 N(d2) #DIV/0! Cash from Operations 1 1 2.1 3.0 4.0 6.0 80 110 Price of call #DIV/O! minus: Capital Expenditures 10 10 13 20 18 10 Difference: = Net Cash Flow (NCF) - Value of Option over PV #DIV/0! Terminal Value 110 % of PV #DIV/0! PV of NCF PV of Cap. Ex. (Yrs. 1-2)