Aldi Stores is considering a new store in Queensland that requires and investment of $5,000,000 now. The store is expected to generate a present value cashflow of $4,500,000 per year for the foreseeable future. The standard deviation of expected cash flow is quite risky at 30%. The ten year risk-free rate is currently at 5%. The current agreement allows Aldi to close the store anytime in the next 10 years and sell the land for $450,000.

a. Should Aldi accept or reject the investment opportunity after considering the abandonment option? Show your detailed calculations using the Black & Scholes formula.

b. How would your decision change if Aldi has an option to expand the store anytime in the next 10 years? The cost of expansion would be $2,500,000 and the best estimation of the present value of this expansion is $1,800,000 million. The standard deviation and risk-free rate will be the same as above. For part (b) assume that the option to abandon does not exist.