Use a Binomial Tree to Value the Following Option

question 19

Multiple Choice

Use a binomial tree to value the following option. Assume r_f = 0.04, r_p =0.12, σ = 0.35, E(CF₁) = $30, and cost = $300. What is the value of this project option?

• A) $40.74
• B) $50.60
• C) $55.32
• D) $62.12

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Definitions:

Marginal Utility

The extra pleasure or benefit a consumer receives from having one additional unit of a product or service.

Pepsi

A global brand of carbonated soft drinks produced and manufactured by PepsiCo.

Marginal Utility

The extra pleasure or advantage gained by using an additional unit of a product or service.

Total Utility

The total satisfaction or benefit received by consuming a product or service.