Use increment to value the scale-up option

Reference no: EM13199465

A firm has undertaken a project in which the firm has the option to invest in additional manufacturing and distribution resources (or scale up). The project's current value is V0 = $25M. Anytime over the next three years, the firm can invest an additional I = $7.5M and receive an expected 25% increase in net cash flows and, therefore, a 25% increase in project value. The risk-free interest rate is 4% and the volatility of the project's value is 30%. Use a binomial lattice with a one-year time increment to value the scale-up option.

Reference no: EM13199465

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