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Exogenous Price Uncertainty and The Option To Invest Answer The Following
Exogenous Price Uncertainty and The Option To Invest Answer The Following
c. Calculate the NPV (at t = 0) of waiting one year before making a decision.
d. Decompose option value into intrinsic value and time value. Should this investment be made
today, in one year, or not at all?
e. Suppose price will be either ¥70,000 or ¥30,000 with equal probability in one year. How does
this increase in endogenous price uncertainty affect option value?
Exhibit T16.1
A proposed plant in China will process soybeans for the local (Chinese new yuan, or ¥) market.
The sales price of a ton of processed soy will be determined by a government panel, and will be
known with certainty in one year. The plant must decide whether to begin production today or in
one year.
Tax rate TC = 0%