QUESTION 5 Real Options A Part 1: You develop a new stock picking strategy. You think this strategy will deliver high returns with minimal risk, but you have not tested it out. The bankers at Goldman Sachs believe in your idea and give you $2 million dollars to start (t=0). In reality, there is a 10% your trading strategy works and will turn $2 M into $3 M in one year (t=1). On the other hand, there is a 90% your idea isn't perfect and the $2 M turns into $1 M (t=1). If the discount rate is 10%, what is the NPV of this investment? O $OM $0.909 M $0.182 M -$1.091 M QUESTION 6 Real Options A Part 2: The bankers at Goldman Sachs see the real option here. If your trading strategy proves to be successful, they plan to give you $50 M at t=1 to invest to get back $75 M a year later at t=2. With this expansion option, what is the NPV of this investment? (Hint: Draw a timeline of cash flows for the successful outcome.) O $OM O $11.182 M $25 M $0.744 M QUESTION 7 Real Options A Part 3: What is the option value of the real option described above? QUESTION 5 Real Options A Part 1: You develop a new stock picking strategy. You think this strategy will deliver high returns with minimal risk, but you have not tested it out. The bankers at Goldman Sachs believe in your idea and give you $2 million dollars to start (t=0). In reality, there is a 10% your trading strategy works and will turn $2 M into $3 M in one year (t=1). On the other hand, there is a 90% your idea isn't perfect and the $2 M turns into $1 M (t=1). If the discount rate is 10%, what is the NPV of this investment? O $OM $0.909 M $0.182 M -$1.091 M QUESTION 6 Real Options A Part 2: The bankers at Goldman Sachs see the real option here. If your trading strategy proves to be successful, they plan to give you $50 M at t=1 to invest to get back $75 M a year later at t=2. With this expansion option, what is the NPV of this investment? (Hint: Draw a timeline of cash flows for the successful outcome.) O $OM O $11.182 M $25 M $0.744 M QUESTION 7 Real Options A Part 3: What is the option value of the real option described above