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Black Scholes Option Pricing

Suppose Microstuff Corporation has the opportunity to invest in a new computer technology that would use television sets to connect to the Internet. In the first phase an initial outlay of $100 million is required for a pilot project to determine the feasibility of the technology. In the second phase, one year from now, an additional investment of $1 billion would be required. suppose that viewed from today's perspective the value of the project a year from now is a random variable with a mean of $1.1 billion and a standard deviation of .20. The required rate of return on the project is 10% per year. Use the Black-Scholes option-pricing model to help determine if this is a worthwhile investment.

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Suppose Microstuff Corporation has the opportunity to invest in a new computer technology that would use television sets to connect to the Internet. In the first phase an initial outlay of $100 million is required for a pilot project to determine the feasibility of the technology. In the second phase, one year from now, an additional investment of $1 billion would be required. suppose that viewed from today's perspective the value of the project a year from now is a random variable with a mean of $1.1 billion and a standard deviation of .20. The required rate of return on the ...

Solution Summary

Use the Black-Scholes option-pricing model to help determine whether an investment is worthwhile .

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