Use a binomial tree to value to following option. Assume r_f= 0.045, r_p= 0.14, σ = 0.20, E(CF₁) = $62 million, g = 0.03, time horizon = 2 years, binomial period = 1 year, and cost = $500 million. What is the value of this project option? A) $47 million B) $57 million C) $67 million D) $77 million

Question

Quizplus · Accepted Answer

The binomial tree method involves calculating the expected cash flows at each node, discounting them back at the risk-free rate, and considering the growth rate and volatility. The calculations show that the option value is closest to $67 million.

Use a Binomial Tree to Value to Following Option