Question: A firm anticipates an R&D program requiring as many as three stages. A successful program (sooner or later) will earn the firm a commercial profit

A firm anticipates an R&D program requiring as many as three stages. A successful program (sooner or later) will earn the firm a commercial profit of $20 million. The investment costs for the respective stages are $5 million, $3 million, and $4 million, and the conditional probabilities of success are .2, .3, and .1, respectively. What is the firm’s optimal investment policy? What is its expected profit?

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