Answer Happy

3) You have launched a project. Several years later, due
to competition in the business, cash flow drops and the present
value of future cash flows is $12 million. You have the option to
abandon the project, with recovery of $13 million from the sale of
the equipment and real estate. You can either abandon the project
now or wait for one year to decide. Assume one year standard
deviation of the project is 25% and 2% risk-free rate. Do you want
to abandon the project now or wait for one year to decide? Show
your work to get full credit. Keep four decimals.
(a). If you consider the option to abandon the project
in one year as a put option, what’s the current value of the
underlying asset and what’s the exercise price?
(b). What’s the call option price with the same terms
(expiration dates, exercise price, underlying stock) using
Black-Scholes model?
(c). What’s the value of the put option using put-call
parity?
(d). Do you want to abandon the project now or wait for
one year to decide? Why?