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Stulz Co. is considering to start a new project. If Stulz Co. commits and invests $450...

Stulz Co. is considering to start a new project. If Stulz Co. commits and invests $450 mil today, the present value project is $500 mil (i.e. NPV = $50 mil). If the project gets off to a good start and demand is high in year 1, the cash flow at year 1 will be $62.5 mil and the value of project rises to $625 mil. But, if things don't work out, the cash flow at year 1 is only $40 mil and the value of project falls to $400 mil. Although the project lasts indefinitely, we assume that investment can’t be postponed beyond the end of the first year, and therefore we observe only the cash flows for the first year and the possible value of project at the end of the first year. If Stulz Co. undertakes project right away, it captures the first year’s cash flows ($62.5 mil or $40 mil). If Stulz Co. delays, it misses out this cash flow, but it will have more information on how the project is likely to work out.

Risk free interest rate is 2%.     Calculate the value of timing (delay) option.

A.

$22.90 mil
B.

$105.88 mil
C.

$48.52 mil
D.

$37.19 mil
E.

$57.17 mil
F.

$78.59 mil
G.

$98.03 mil
H.

$72.73 mil

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