Real option As a venture capitalist you are considering an investment opportunity to invest...
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Real option As a venture capitalist you are considering an investment opportunity to invest in a 10-year project that requires an initial investment of $10 million in new product partnership. As of now, the expected PV of this project is estimated as only $9.5 million. Nevertheless, whats special about this project is the agreement that you can sell your share of the ownership to other partners anytime in the next ten years (fixed and guaranteed), for $7.5 million. The variance in the PV of cash flows from being in the partnership is moderate and calculated as 0.04. The 10-year risk-free rate is assumed as 3% per year. This project value decay in time with the rate of 5% per year).
N(1.0397) = 0.8508 N(0.3738) = 0.6457 N(1.3578) = 0.9127 N(0.4582) = 0.6766 N(0.0911) = 0.5363 N(0.0547) = 0.5218 N(-0.2587) = 0.3979 N( d1=?) = 0.90 N( d2=?) = 0.55 Note: In the case you could not find N(d) that matches your d1 and d2, please use N(d1=?) and N(d2=?).
However, please indicate exact numbers you get for d1 and d2. Required: Calculate the value of real option embedded in this project. Is the value of real option high enough to make this investment worthwhile?
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