Generate a binomial tree to value the development option

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Assume that the project in Problem 5 is valuable if it can generate a cash flow above $25 million. A decision on whether to develop the project at a cost of $6.5 million needs to be made today if the project is to be implemented in three years. Given a 5% annual risk-free rate and the calculations from Problem 5, generate a binomial tree (each stage of the tree being one year) to value the development option and make a decision.

U = ___ (round this answer to four decimal places)

D = ___ (round this answer to four decimal places)

q = ___ (round this answer to four decimal places)

Value of the option = $ ___ million (round this answer to two decimal places in millions)

Should R&D go forward? "Yes" or "No"

Reference no: EM132025571

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