3. The manufacturing firm X have the option to go ahead with a project. Assume that...

    

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3. The manufacturing firm X have the option to go ahead with a project. Assume that the projects first year costs $60, and increases to $70 in the second year due to expected increase in raw material and other input costs. The volatility is 50% the first year and decreases to 30% the second year. The decrease stems from the fact that it is a new market that will settle down. The complications you should take into consideration in this task are the change in implementation cost and the change in volatility. Other important information needed have been estimated to: S = 100, T = 2, rf = 3% i) What is the maximum you would like to pay to acquire this project? ii) What are the optimal decisions in each node of the decision tree? 3. The manufacturing firm X have the option to go ahead with a project. Assume that the projects first year costs $60, and increases to $70 in the second year due to expected increase in raw material and other input costs. The volatility is 50% the first year and decreases to 30% the second year. The decrease stems from the fact that it is a new market that will settle down. The complications you should take into consideration in this task are the change in implementation cost and the change in volatility. Other important information needed have been estimated to: S = 100, T = 2, rf = 3% i) What is the maximum you would like to pay to acquire this project? ii) What are the optimal decisions in each node of the decision tree?

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