A heavy manufacturing company wants to decide whether to initiate a new project. The success of the project depends heavily on the state of the economy, which has a 50/50 chance of being strong enough to support the venture. The project will require an initial investment of $1 million dollars, and the company expects to earn $500,000 in annual revenues from the project—unless the economy goes into recession, in which case the project will return only $100,000 per year. The company requires a 12% return on its investments. Should it undertake the project?

If the company decides to wait a year, the economy has a 75% chance of improving sufficiently to ensure $500,000 in annual returns. Does it make sense to wait for a year before making the investment? Use the options model approach to project evaluation to answer these two questions.