Say that we plan to make a new computer product We have already spent a total of $5 M The project will require an additional investment of I $3 M at t 0 (now) This investment must be made now, or the project cannot proceed Also, the product will require us to acquire some intellectual property (IP) to defend ourselves from potential lawsuits from competitors Suppose that the cost of the IP will be 0 1 S t (in millions), where S t is the stock price for Google (GOOG) That is, if Google becomes more successful, the intellectual property will be more expensive to buy Although we must invest I at t 0, we may choose to wait one year to acquire the IP and sell the product Whether we choose to acquire the IP at t 0 or t 1, the product will go to market at t 1 and will produce revenues of R $65M with no additional costs Suppose the risk free rate is r 2 (EAR) Also say that Googles current stock price is $600 Suppose also that Googles stock at t 1 will either rise to $740 (60 chance actual probability) or fall to $580 (40 chance actual probability) Consider the following options O1 Invest now ( t 0), acquire the IP now ( t 0), and produce the product at t 1 O2 Invest now ( t 0), but wait until t 1 and, if conditions are favorable, acquire the IP and produce the product Find the risk neutral probability that GOOGs stock price at t 1 is $580 Find the value of a put on GOOG struck at K $580 expiring in one year Compute the NPV of strategy O1 Compute the NPV of strategy O2 Which strategy would you recommend Does your answer depend on how risk averse you are Why or why not

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Say that we plan to make a new computer product  We have already spent a total of   $5 M   The project will require an additional investment of I  $3 M at t   0 (now)  This investment must be made now, or the project cannot proceed  Also, the product will require us to acquire some intellectual property (IP) to defend ourselves from potential lawsuits from competitors  Suppose that the cost of the IP will be 0 1 S t (in millions), where S t is the stock price for Google (GOOG)  That is, if Google becomes more successful, the intellectual property will be more expensive to buy  Although we must invest I at t   0, we may choose to wait one year to acquire the IP and sell the product  Whether we choose to acquire the IP at t   0 or t   1, the product will go to market at t   1 and will produce revenues of R   $65M with no additional costs  Suppose the risk free rate is r   2  (EAR)  Also say that Googles current stock price is $600  Suppose also that Googles stock at t   1 will either rise to $740 (60  chance actual probability) or fall to $580 (40  chance actual probability)  Consider the following options  O1  Invest now ( t   0), acquire the IP now ( t   0), and produce the product at t   1  O2  Invest now ( t   0), but wait until t   1 and, if conditions are favorable, acquire the IP and produce the product  Find the risk neutral probability that GOOGs stock price at t   1 is $580  Find the value of a put on GOOG struck at K   $580 expiring in one year  Compute the NPV of strategy O1  Compute the NPV of strategy O2  Which strategy would you recommend  Does your answer depend on how risk averse you are  Why or why not

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Question: Say that we plan to make a new computer product. We have already spent a total of = $5 M . The project will require

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