Business, 10.05.2021 21:50, tomuchsaucecj

You are considering setting up a firm to produce widgets. The cost of the project is $10 million 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 $20 million and when the demand is low cash flows in t = 1 are $5 million. The discount rate is 50%. 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?

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You are considering setting up a firm to produce widgets. The cost of the project is $10 million tod...