Portfolio 2 Assignment: Online Shopping Application (10%, due Week 12, Sunday 24 January 11:59pm) Overview This is the first part of the second Portfolio-worth 10% of your final grade for….
What is the value of the option to invest in Comp-II?
1. Your firm is looking at a proposal to manufacture a certain computer called Comp-I. The
projected cash flows for this proposal are as follows:
The discount rate applicable to this proposal is 20 percent.
If your fi rm undertakes Comp-I proposal, it will be in a position to make a follow on
investment in an advanced version, Comp-II, four years from now. Comp-II will be double
the size of Comp-I in terms of investment outlay and cash infl ows. The cash infl ows of Comp-
II would have a standard deviation of 30 percent per year.
(a) What is the net present value of the cash fl ows of Comp-I?
(b) What is the value of the option to invest in Comp-II?
Assume that the risk-free rate is 12 percent.