Look again at the valuation in Table of the option to invest in the Mark II project. Consider a change in each of the following inputs. Would the change increase or decrease the value of the expansion option?
a. Increased uncertainty (higher standard deviation).
b. More optimistic forecast (higher expected value) of the Mark II in 1985.
c. Increase in the required investment in1985.

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Assumptions 1. The decision to invest in the Mark Il must be made after three years, in 1985. 2. The Mark Il investment is double the scale of the Mark I (note the expected rapid growth of the industry) Investment required is $900 million (the exercise price), which is taken as fixed. 3. Forecasted cash inflows of the Mark ll are also double those of the Mark I, with present value of $807 million in 1985 and 807/(1.2)3 $467 million in 1982. 4. The future value of the Mark Il cash flows is highly uncertain. This value evolves as a stock price does with a standard deviation of 35% per year. (Many high-technology stocks have standard deviations higher than 35%) 5. The annual interest rate is 10%. Interpretation The opportunity to invest in the Mark Il is a three-year call option on an asset worth $467 million with a $900 million exercise price. Valuation PV(exercise price) 676 Call value = [N(d) x PJ-[N(de) x PV(EX)] log[.691V606 606/23072 N(d) 3793, N(d2)1805 Call value-I-3793 × 467]-[.1805 × 676] $55.1 million