Use a binomial tree to value the following option. Assume r_f= 0.04, r_p=0.12, σ = 0.35, E(CF₁) = $30, and cost = $300. What is the value of this project option? A) $40.74 B) $50.60 C) $55.32 D) $62.12

Question

Quizplus · Accepted Answer

The binomial tree method involves calculating the present value of expected cash flows, considering the risk-free rate and the project's risk. Given the parameters, the correct calculation leads to a project option value of $40.74.

Use a Binomial Tree to Value the Following Option