What is the option value of waiting

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Question - Jennifer is considering opening a dessert shop in Harvard Square, but frozen yogurt and ice cream are competing to capture the hearts of customers. Frozen yogurt has a 40% chance of winning, while ice cream has 60%, and the winner will be known after one year. Assume that a frozen yogurt store would cost $140,000, an ice cream store would cost $110,000, and the discount rate is 25%. Each store during the year gives Jennifer earnings of $20,000, which accrues at the end of the year, after which the winning type store is worth $200,000, while the losing type store is worthless. In this example, what is the option value of waiting?

-$56,000

$62,400

$56,400

$6,000

Reference no: EM132188551

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