You are assessing a four year project where there are three possible outcomes: a good state a neutral state and a bad state. In the good state there are cash
flows in each of the 4 years of $40 million. In the neutral state there are four cash flows of $25 million and in the bad state there are four annual cash
flows of $15 million. Each cash flow is received on the last day of the year. The probability of the good state is 20% neutral state is 50% and the bad state
is 30%. The WACC of the project is 10% and the risk-free rate is 3%. The project costs $75 million to implement.
a) Absent any options would you accept this project? why? why not?
b) suppose you had the option to postpone the project for 1 year. What is the value of this option using Black-SCholes formula?
c) SUppose that you had the option to abandon this project and receive a salavage value of $65 million for the project at the end of the 2 years. Using
Black-Scholes formula find the value of the option. Find the value of the project with the option.
d) Intepret your results. Which option would you take? Why?