Question

Assumptions
1.	The decision to invest in the Mark II must be made after three years, in 1985.
2.	The Mark II has an investment requirement of $1,000 million, which is taken as fixed.
3.	Forecasted cash inflows of the Mark II have a present value in 1985 of $907 million and $525 (907 / 1.23 = 525) million in 1982.
4.	The future value of the Mark II cash flows is highly uncertain. This value evolves as a stock price does with a standard deviation of 44% per year.
5.	The annual interest rate is 10%.
Interpretation
The opportunity to invest in the Mark II is a three-year call option on an asset worth $525 million with an exercise price of $1,000 million.

How does the value of the option to invest in the Mark II in 1982 change if:

a. The investment required for the Mark II is $900 million (vs. $1,000 million)? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Option value            $

b. The present value of the Mark II is 1982 is $600 million (vs. $525 million)? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Option value            $

c. The standard deviation of the Mark II's present value is only 29% (vs. 44%)? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Option value            $