A firm producing mobile-phones has an opportunity to switch the operating system used in its mobile-phones after
Question:
A firm producing mobile-phones has an opportunity to switch the operating system used in its mobile-phones after 24 months. Suppose that the present value of expected future cash inflows from adopting the new operating system is 90 million euros and may fluctuate with a volatility of 50%. Switching the operating system involves making an expenditure of 80 million euros. The risk-free interest rate is 2%.
The company faces with the dilemma of whether to invest immediately, thus ignoring flexibility, or making an additional investment (equal to $10m) that allows her to wait until uncertainty is solved.
Compare the value of an immediate investment with the option to wait and invest after 24 months (consider a two-stages binomial model). What is more convenient for the firm?
Adopt the B&S formula to compute the value of the option. Compare this value with the option value computed with the binomial model. If it is different, give your explanation (Use the Table of the Normal Distribution, attached)
Referring to the B&S formula computed in point what does N(d2) represent?
Financial Accounting Theory and Analysis Text and Cases
ISBN: 978-1118582794
11th edition
Authors: Richard G. Schroeder, Myrtle W. Clark, Jack Cathey