Calculate the value of real option embedded in this project

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Question - As 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, what's 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 (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?

Reference no: EM132997210

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