Assignment:
Application of option pricing to corporate finance
PietreDure Inc. has a one-year proprietary license to develop software essential for creation of a new generation of FastBooks. The project's estimated cost is $25 million. If consumers love the new FastBook, PietreDure's revenues will skyrocket. Otherwise, if sales of FastBooks turn out to be low, PietreDure will be ruined.
Pietre Dure has an option similar to a _____ option, which enables it to minimize the risk by taking the following action:
- Wait for a year and then sell the license if consumers love FastBook.
- Wait for a year and then undertake the project if there is a great demand for the FastBook.
- Undertake the project now to get ahead of the industry in creating the software.
- Abandon the project now because it is too risky.