Company X is specialist in short term projects of the now or never type. It came across the following project:
Investment t0=30, one unit to be produced at t1 at a variable cost of 77, price of the product at t0=110, price either doubles or halves next period with equal probabilities. The risk free interest rate is 10%.
a) What is the value of the project if accepted completely on a now or never basis and what is the risk adjusted discount rate?
A newcomer at Company x wants to introduce long term thinking by introducing the flexibility to postpone the production decision to next period.
b) What is the value of the project on the basis of flexibility and what is the risk adjusted discount rate?