17. Diplomat.com is considering a project that has an up-front cost of $3 million and is expected to
produce a cash flow of $575,000 at the end of each of the next 5 years. The project's cost of capital
is 16%. What is the project's net present value? Answer: -$1,117,281.15
18. Refer to problem 17. If Diplomat goes ahead with this project today, it will obtain knowledge that will
give rise to additional opportunities 5 years from now (at t = 5). The company can decide at t = 5 whether
or not it wants to pursue these additional opportunities. Based on the best information available today,
there is a 40% probability that the outlook will be favorable, in which case the future investment
opportunity will have a net present value of $6 million at t = 5. There is a 60% probability that the outlook
will be unfavorable, in which case the future opportunity will have a net present value of -$2 million
(negative) at t = 5. Diplomat.com does not have to decide today whether it wants to pursue the additional
opportunity. Instead, it can wait to see what the outlook is. However, the company cannot pursue the
future opportunity unless it makes the $3 million investment today. What is the estimated net present
value of the project after consideration of the potential future opportunity Answer: $25,390.09
19. Refer to problems 17 and 18. What is the value of the option to expand Diplomat.com's project
from the decision-tree analysis you have completed in problems 17 and 18?
20. Refer to problems 17 and 18. Next, we plan to use the Black-Scholes model to estimate the value of
this option to expand the project at t = 5. Calculate P = current stock price = PV as of t = 0 of all
expected future cash flows if the project is expanded at t = 5.
21. Refer to problem 20. Now use the Black-Scholes model to estimate the value of this option to
expand the project at t = 5. Use the P you calculated in problem 20, plus assume that the variance of
the project's rate of return is 40% and that the risk-free rate of return is 5%. ***I need help with 19, 20, and 21.