On May 7, 2008, Chrysler, in the US, announced a deal called “Let’s Refuel America”, where the purchaser of certain new models of vehicles would receive a card that allows the holder to purchase a gasoline or diesel fuel that locks in the price at $2.99 a gallon for three years with 12,000 miles of driving a year.

Estimate the value of this Deal to the potential buyer for the following two models:

Dodge Caliber: 24 MPG

Dodge Ram: 15 MPG

So, the buyers of Dodge Caliber can purchase up to 500 gallons of gasoline at $2.99 per gallon per year, and the buyer of Dodge Ram can purchase up to 800 gallons at $2.99 per gallon per year for the next three years.

When valuing the Deal use the following information:

1. Assume that the spot gasoline price at the time of the Deal's valuation is $3.613 per gallon.

2. Assume that the risk-free interest rate is 1.55% compounded continuously.

USE BINOMIAL METHOD TO CALCULATE

Answer rating: 100% (QA)

1 Dodge Caliber The value of the deal to the potential buyer is 149468 This is calculated as f... View the full answer