You produce the figure above to explain your reasoning. It is analogous to American option pricing. If immediately developed, the NPV of the project is $10 million, but because the concession is valid for three periods (including period 0), the government should charge a higher fee.
1. What is the maximum fee the government should charge for the concession?
2. Your contact person in the government, who recently studied Economic of Finance, wants you to be more explicit about your calculations. In particular you are asked to produce atomic prices for all future time-states g, b, gg, gb, bg, bb and calculate the maximum value of the project using these atomic prices and future payments. There are several ways to do this. You are free to use any method (incl. making use of risk-neutrality). (2 marks for ECON3107, 1 mark for ECON5106)
3. Discuss how the atomic prices and the project valuation would change (qualitatively, not the exact numbers), if the company was actually risk-averse rather than riskneutral.
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