Question: A firm is deciding whether to implement a new innovation on one of its products. The firm will know the market's response in one year.

A firm is deciding whether to implement a new innovation on one of its products. The firm will know the market's response in one year.  


If the innovation increases product demand, the present value of cash flows in one year will be $70,000.  


If it decreases product demand, the present value of cash flows in one year will be $45,000.  The current value under these assumptions is $55,000.


Suppose that one year from today, the firm would be able to sell the innovation for $50,000 if it proves unsuccessful.


What is the value of the firm's option to abandon the innovation?

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