You are considering investing in a project related to a new product opportunity. If you undertake the project immediately, you calculate the NPV will be $165,000. If you postpone the decision for one year, you will learn more about the relevant manufacturing process as well as the market for your product. If you wait one year, you expect with 80 percent likelihood competitors will enter the market and your NPV (in one year) will be - $20,000. With 20 percent likelihood, you will be the only market player and you will improve your production technology to create an NPV (in one year) of $400,000. The appropriate discount rate is 11 percent. Required: Calculate the expected NPV if you defer the project for one year, regardless of the potential scenario. Calculate the expected NPV if you strategically decide how to undertake your project. That is, if we find that competitors enter the market, we can decide not to enter. Interpret the difference in your answers to parts 1 and 2.
You are considering investing in a project related to a new product opportunity. If you undertake the project immediately, you calculate the NPV will be $165,000. If you postpone the decision for one year, you will learn more about the relevant manufacturing process as well as the market for your product. If you wait one year, you expect with 80 percent likelihood competitors will enter the market and your NPV (in one year) will be - $20,000. With 20 percent likelihood, you will be the only market player and you will improve your production technology to create an NPV (in one year) of $400,000. The appropriate discount rate is 11 percent. Required: Calculate the expected NPV if you defer the project for one year, regardless of the potential scenario. Calculate the expected NPV if you strategically decide how to undertake your project. That is, if we find that competitors enter the market, we can decide not to enter. Interpret the difference in your answers to parts 1 and 2.
Chapter11: Capital Budgeting And Risk
Section: Chapter Questions
Problem 20P
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You are considering investing in a project related to a new product opportunity. If you undertake the project immediately, you calculate the
Required:
- Calculate the expected NPV if you defer the project for one year, regardless of the potential scenario.
- Calculate the expected NPV if you strategically decide how to undertake your project. That is, if we find that competitors enter the market, we can decide not to enter.
- Interpret the difference in your answers to parts 1 and 2.
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