IBM, which is considering the development of a quantum computer. Initial costs would be $5 billion and cash flows from year one through year five would be $1.3 billion. Let r = 14%. Four years from now, the firm believes it will be able to develop a second generation of quantum computers that will be ready to go commercial. This, too, would last five years. It would be 3 times larger than the first project. Without the first project, the firm would not be able to invest in the next generation project. Let the risk-free rate be 2% (after some rate cuts) and the standard deviation of cash flows be 50% per year. 

Find the value of the option to invest in the second quantum computer project.

Answer rating: 100% (QA)

To find the value of the option to invest in the second quantum computer project we can use the conc... View the full answer