You are trying to decide whether to make an investment of $500 million in a new technology to produce Everlasting Gobstoppers. There is 60% chance that the market for these candies will produce profits of $100 million annually in perpetuity, and a 40% chance that the market will produce profits of only $20 million per year in perpetuity. The size of the market will become clear one year from now. Assume the cost of investment is the same this year or next year and the cost of capital of this project is 10% p.a.. The value of the option to wait is around: a. $400 million b. $0 million c. $36 million d. $93 million e. None of the above

You are trying to decide whether to make an investment of $500 million in a new technology to produce Everlasting Gobstoppers. There is 60% chance that the market for these candies will produce profits of $100 million annually in perpetuity, and a 40% chance that the market will produce profits of only $20 million per year in perpetuity. The size of the market will become clear one year from now. Assume the cost of investment is the same this year or next year and the cost of capital of this project is 10% p.a.. The value of the option to wait is around: a. $400 million b. $0 million c. $36 million d. $93 million e. None of the above

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter14: Real Options

Section: Chapter Questions

Problem 4MC

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