3. Estimating the inputs using the Black Scholes option pricing model in the option analysis of the investment timing option Option analysis involves gathering significant amounts of information, vyrthesizing the data, and using the data in models applied in eption analysis. RTE Com Inc. is considering a project for a new doud-based online storage system for companies and individuals ts back up their data. The cost of the project is $55 million, but the future cash flows depend on how this new cloud-based online storage will compete with existing companies that offer onteie data backup. The company believes that this project has a strong selling feature but is uncertain that it would earn cash flows as projected. The team proposing this project has come up with the following data: Demand Annual Cash Flow Probability 0.40 $50 milion Average 0.40 $35 milion Low 0.20 $15 wellion Project's cost of capital 12.00% Life of project Three years 52 ck Treasury note Hin $35 minon Low $15 million 12.00% Project's cost of capital Life of project Three years 52-week Treasury note 5% The project team also noted that the company has an option to wait for one year in order to see its competitors positions and observe how the market responds. This will help in getting more information about market demand and in figuring out which set of cash flows will occur. Analysts used different approaches to evaluate the project, but the management team insists that the Black-Scholes option pricing model (OPM) will help them make a more informed decision. The model requires five inputs: (1) the risk-free rate; (2) the time until the option expires; (3) the strike price; (4) the current price of the stock, which in this case would be a proxy for the value of the underlying asset; and (5) the vanance of the project's expected return You need to calculate both the value of the underlying asset in the project and its rate of return. For RTE Com Inc., the underlying asset is the project tlf. The current value of the project will be the value of its expected cash flows. D Based on the data given, calculate the value of the project, its return, and the standard deviation of the returns (using the direct method) if the numpany decides to wait for a year. (Note: Cash flow values in the table are in millions. Round all final answers to two decimal places) MINU 0.20 CENGAGE | MINUTAP Ch 14: Assignment-Real Options Now: Yr Yr Y Yr YFO P 1 2 3 4 High 0.40 $50 $50 $50 Average 0.40 835 $35 $35 Low 0,20 - $15 $15 $15 Expected return (1-3) Standard deviation of returns: Expected Value of PVS (1) Expected Value of 4 PVS (1-0): Analysts will use these values in the Black Scholes model, which is represented by the following formula VPN (d,)-XN () PV Cash flows (t-1) PV Cash flows (1-0) PO P Probability (P) x Return Probability (P) PV Cash Flow Searni Analysts will use these values in the Black-Scholes model, which is represented by the following formula V__PN(d) Xem N(d) Based on the data collected and results from the calculations, estimate the input values to be used in the Black Scholes OPM: THE Risk-Free Interest Rate 1 Time until Option Expires M X Cost to Implement the Project Current Value of the Project 0 Vartance of the Project's Rate of Return 144 N(d,) TEPE Cumulative Normal Distribution Function of d N(d,) -Cumulative Normal Distribution Function of d ~)++ (/2))/(at2)] P NE( N(d,)