The Opportunity to Invest in a Project Can Be Thought

question 34

Multiple Choice

The opportunity to invest in a project can be thought of as a two year option on an asset which is worth $400 million (PV of the cash flows from the project) with an exercise price of
$600 million (investment needed) . Calculate the value of the option given that N(d1) = 0.6 and
N(d2) = 0.4 and interest rate is 6%.

• A) $26.4 million
• B) Zero
• C) $200 million.
• D) None of the above.

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Definitions:

Memorization

The process of committing something to memory or learning it by heart.

Hindsight Bias

The inclination to think, following an event, that one could have foreseen or anticipated the result, commonly called the "I-knew-it-all-along" effect.

Spontaneous Recovery

The reappearance of a conditioned response after a period of apparent extinction or reduction.

Repressed Memories

Remembrances that have been involuntarily repressed, connected to severe stress or distressing experiences.