BlueTech is planning to market and sell its new Bluetooth-enabled shoe in two ma

Question

BlueTech is planning to market and sell its new Bluetooth-enabled shoe in two markets: national and international. The local market will require an initial investment and will have cash inflows for three years. If things work out, they will invest in an expansion and sell internationally, expecting benefits for four years. Assume a MARR of 12% and a risk-free interest rate of 6 %. Consultants suggest that the volatility of the cash flows is between 35% and 50%. Discuss their expansion strategy.

Year     $

0          Invest $30 Million
1         $10 Million
2         $12 Million
3         $14 Million
4         Invest $60 Million
4        $16 million
5        $18 Million
6        $20 Million
7        $20 Million

Hint: You may use black-scholes formula

Explanation / Answer

C= SN (d1)-

N(d2)Kert

C = Call premium

S= Current stock price

T=Time until option exercise

K = Option Striking price

R = Rist free interestr Rate

N= Cumulative standard normal distribution

e=exponential term

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