A Firm Has a Three-Year Real Option to Invest in a Project

question 1

Multiple Choice

A firm has a three-year real option to invest in a project that has a present value of $500 million with an exercise price (in year 3) of $800 million.Calculate the value of the option given that N(d1) = 0.3 and N(d2) = 0.15.Assume that the risk-free interest rate is 6 percent per year.

• A)$30 million
• B)$49.25 million
• C)zero
• D)$7.08 million

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Definitions:

Condorcet Paradox

The Condorcet Paradox is a concept in voting theory where individual preferences cannot be aggregated into a consistent collective decision without creating contradictions.

Arrow's Properties

A set of criteria designed by economist Kenneth Arrow to assess the social welfare or collective decision-making functions, ensuring fairness, unanimity, and independence of irrelevant alternatives.

Pairwise Majority Voting

A voting system where candidates are compared in pairs, with each pair being voted on separately, to determine the most preferred option by majority decision.

Condorcet Paradox

A situation in social choice theory where collective preferences can be cyclic (i.e., not transitive), even if the individual preferences within the group are rational and transitive. It highlights the complexity of voting systems and decision making.