You are considering setting up a firm to produce widgets


You are considering setting up a firm to produce widgets. The cost of the project is $30 today. The demand for widgets is uncertain. It can be either high or low with equal probability. When the demand is high cash flows in t = 1 are $66 and when the demand is low cash flows in t = 1 are $34. The discount rate is 10%.

a) What is the NPV of the project?

b) Suppose you can commission a study that tells you whether the demand for widgets will be high or low. The study takes one year to complete. That is, if you commission the study you must decide in t = 1 whether to invest. If you invest the cash flows will arrive in t = 2. What is the maximum amount you are willing to pay for the study today?

Request for Solution File

Ask an Expert for Answer!!
Financial Management: You are considering setting up a firm to produce widgets
Reference No:- TGS0978454

Expected delivery within 24 Hours