8-1. Hybrid Hydrogen, a new division of a major American auto manufacturer, is considering development of hybrid cars that can run on hydrogen fuel. Since there is market uncertainty regarding future sales, the company wants to use the options approach to value the project for a go/ no-go investment decision. The project is divided into two phases: the design/engineering phase and the manufacturing phase. The first phase has to be completed before the second phase can begin. The design phase can start anytime next year, whereas the manufacturing phase can start anytime in the next three years. Design is expected to cost $200 million and manufacturing an additional $600 million. DCF analysis using an appropriate risk-adjusted discount rate values the present value of the future cash flows from this operation at $600 million. The annual volatility of the logarithmic returns of the future cash flows for the car is estimated to be 30%, and the continuous annual risk-free interest rate over the next five years is 6%. What is the value of the option to stage?

8-2. If there is no flexibility in the investments in Problem 8-1, what is the DCF-based NPV for this project assuming a 10% interest rate for discounting the investment costs?

8-3. Reconsider the Hybrid Hydrogen problem as a simple option where the company has the flexibility to make a single combined investment. The option life in this scenario is one year and the investment cost $800 million (the sum of the investment costs...