3. Your company is considering investing in an electric car dealership. If you invest now, the dealership
will cost $10 million today and will produce expected after-tax year-end profits of $525,000 for the
coming year. Future profits are expected to grow at 5% per year. Due to uncertainty regarding
battery costs and customer demand, you estimate that the annual volatility of the value of a
dealership is 20%.
You also have the option to wait two years before investing, but the initial investment will be $11
million at that time. Your cost of capital is 10%, and the risk-free rate is 6%. Calculate the value
of the real option to wait.