What is value of the option

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Twin Peaks Ski Lift company is deciding when to build their ski lift. They can build the ski lift now, or in a year, for a cost of $1.1 billion. They expect demand to be 23,000 lift tickets with a free cash flow of $1,000 indefinitely. Twin Peaks also has the option wait one year to start construction to gain a better understanding of demand conditions. Free cash flow one year from now is equally likely to be $1050 per lift ticket, or $950 per lift ticket indefinitely.

What is the value of the option?

Reference no: EM131561820

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