Question

Consider the widget investment problem of Section 17.1 with the following modification.
The expected growth rate of the widget price is zero. (This means there is no reason to consider project delay.) Each period, the widget price will be $0.25 with probability 0.5 or $2.25 with probability 0.5. Each widget costs $1 to produce.
a. What is the expected widget price?
b. If the firm produces a widget each period, regardless of the price, what is the NPV of the widget project?
c. If the firm can choose to produce widgets only when the widget price is greater than $1, what is the NPV?
d. What happens to the NPV if the widget price can be $0.10 or $2.40 with equal probability?


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  • CreatedAugust 12, 2015
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