Question: Please answer Q9. Q8 is for reference QUESTION 8 Real Options B Part 1: You rent office space so you can start a new company.

Please answer Q9. Q8 is for reference

QUESTION 8

  1. Real Options B Part 1: You rent office space so you can start a new company. You need to sign a 2-year lease for $10,000 a year due today and at t=1. After one year, you will know if you new company will take off or not. There is a 25% chance that your company takes off and you will make $80,000 (t=2). There is a 75% chance your business does not succeed. If the discount rate is 8%, What is the expected NPV of starting this company?

    $15,034

    -$2,112

    $17,147

    $0

QUESTION 9

  1. Real Options B Part 2: You rent office space so you can start a new company. You need to sign a 2-year lease for $10,000 a year due today and at t=1. After one year, you will know if you new company will take off or not. There is a 25% chance that your company takes off and you will make $80,000 (t=2). There is a 75% chance your business does not succeed. If you do not succeed, you can rent the office space to another entrepreneur for $8,000 in the second year (paid at t=2). What is the NPV of this project with the option to abandon in the second year?

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