Firm is considering investing in project with cash flows

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1. Using a 3-step binomial tree, find the value of an American 4000-Put with 12 months to maturity for a stock index with a current level of 3800 with 18% volatility and a 1% dividend payout rate (per year) when the risk free rate is 3% per year. Make an excel spreadsheet.

2. Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 9 percent, and that the maximum allowable payback and discounted payback statistics for the project are 2.0 and 3.0 years, respectively. Time: 0 1 2 3 4 5 6 Cash flow –$7,600 $1,190 $2,390 $1,590 $1,590 $1,390 $1,190 Use the NPV decision rule to evaluate this project.

Reference no: EM131915002

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