Question: A venture capitalist is considering taking a 10 year project that requires an initial investment of $10 million in new product partnership. As of now,

A venture capitalist is considering taking a 10 year project that requires an initial investment of $10 million in new product partnership. As of now, the expected PV of this project is estimated as only $9.5 million. Clearly, the project is out-of-the-money at the moment. Nevertheless, whats special about this project is the agreement that he can sell his share of the ownership to other partners anytime in the next 10 years (t = 10), for $7.5 million. The variance in the PV of cash flows from being in the partnership is high and calculated as 0.09. The 10-year risk-free rate is assumed as 3% per year. (Rf = 0.03). This project value decay in time with the rate of 5% per year. Calculate the value of real option embedded in this project.

Step by Step Solution

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock blur-text-image

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock

Students Have Also Explored These Related Finance Questions!

10. Real option to abandon - You aim to attract a venture capitalist in considering taking a 10 year project that requires an initial investment of \$ \\$ 20 \$ million in new product partnership...

Real option - A venture capitalist is considering taking a 10 year project that requires an initial investment of $10 million in new product partnership. As of now, the expected PV of this project is...

b) Planet ltd is considering undertaking a 20 year project which requires an initial investment of sh.250 million in real estate partnership whose present value (PV) of expected future cash flows is...

Taking flotation costs into account will reduce the cost of new common stock True: Taking flotation costs into account will reduce the cost of new common stock, because you will multiply the cost of...

Here is are some multiple choice study questions I'm having trouble understanding. Some of the math questions to solve is difficult. Can you also explain to me how you determine each answers. Assume...

4. The cost of new common stock True or False: The following statement accurately describes how firms make decisions related to issuing new common stock. Taking flotation costs into account will...

Back to Assignment Attempte Do No Harm/2 1. The basic WACC equation The calculation of WACC involves calculating the weighted average of the required rates of return on debt, preferred stock, and...

Thank you 5. The cost of new common stock True or False: The following statement accurately describes how firms make decisions related to issuing new common stock. The cost of issuing new common...

True or False: The following statement accurately describes how firms make decisions related to issuing new common stock. The cost of issuing new common stock is calculated the same way as the cost...

1. White Lion Homebuilders is considering investing in a one-year project that requires an initial investment of $450,000. To do so, it will have to issue new common stock and will incur a flotation...

Bill performed tests of controls for all transaction cycles with good results. Why is it important to also perform substantive audit procedures for the ending cash balance even when tests of controls...

Hurst, Incorporated sold its 8% bonds with a maturity value of $3,000,000 on August 1, 2009 for $2,946,000. At the time of the sale, the bonds had five years until they reached maturity. Interest on...

To calculate a terminal value, one divides the next period s cash flow by the: Group of answer choices constant discount rate plus a constant growth rate constant discount rate minus a constant...

Smith-Kline Company maintains inventory records at selling prices as well as at cost. For 2021, the records indicate the following data: ($ in 000s) Cost Retail Beginning inventory $ 77 $ 140...