1. Suppose that a list contains the values 20 44 48 55 62 66 74 88 93 99 at index positions 0 through 9. Trace the values of the variables….
What is the value of the option to invest in Comp-II?
1. Your firm is looking at a proposal to manufacture a certain computer called Comp-I. The
projected cash flows for this proposal are as follows:
The discount rate applicable to this proposal is 20 percent.
If your fi rm undertakes Comp-I proposal, it will be in a position to make a follow on
investment in an advanced version, Comp-II, four years from now. Comp-II will be double
the size of Comp-I in terms of investment outlay and cash infl ows. The cash infl ows of Comp-
II would have a standard deviation of 30 percent per year.
(a) What is the net present value of the cash fl ows of Comp-I?
(b) What is the value of the option to invest in Comp-II?
Assume that the risk-free rate is 12 percent.