A firm produces electrically$-$assisted e$-$bikes. Currently, it produces a hybrid $($$H$$)$ model, which recharges the battery using the cyclist$$s peddling energy. It has recently developed plans to switch to producing a plug$-$in $($$P$$)$ model whose battery must be charged from an EV charging socket. The firm is aware that the government is thinking about subsidising enhancements to the UK$$s charging infrastructure, which would increase demand for the $P$ model $$ this decision will be taken at the beginning of year $2,$ will take effect immediately and cannot be reversed. Currently, the firm estimates the associated costs and revenues as shown in the following Table. Annual costs for the $H$ and $P$ technologies are denoted $C$^\{$H$\}$$ or $C$^\{$P$\}$$$,$ revenues from model $i$\backslash$in$\backslash$left$\backslash \{$H$,$P$\backslash$right$\backslash \}$$ in state $k$\backslash$in$\backslash$left$\backslash \{$S$,$N$\backslash$right$\backslash \}$$ for Subsidy $($$S$$)$ or No subsidy $($$N$$)$ are denoted $R$\_\{$k$\}^\{$i$\}$$$.\backslash$table$[[\backslash$table$[[$set$-$up cost $SC$

If the firm switches to the plug$-$in $($$P$$)$ model now, the new facility will not come onstream till next year; this year, the firm will pay the set$-$up cost $SC$ and the annual cost $C$^\{$H$\}$$ of producing the existing Hybrid $($$H$$)$ model and get revenues $R$\_\{$N$\}^\{$H$\}$$$.$ From next period onwards, the firm will pay annual cost $C$^\{$P$\}$$ and get the relevant revenues $($depending on the government's decision regarding the subsidy policy$).$

The firm$$s share price is correlated with the government decision as shown in the above table. After next period, the firm continues producing the chosen model $($$H$ or $P$$)$ foIf the firm decides this year $($before the government decision is known$),$ what are the NPVs for the firm if i$)$ it stays with $H$ or ii$)$ it switches to $P$$,$ using the riskless rate for discounting? Which would the firm choose? firm produces electrically$-$assisted e$-$bikes. Currently, it produces a hybrid $($$H$$)$ model, which recharges the battery using the cyclist$$s peddling energy. It has recently developed plans to switch to producing a plug$-$in $($$P$$)$ model whose battery must be charged from an EV charging socket. The firm is aware that the government is thinking about subsidising enhancements to the UK$$s charging infrastructure, which would increase demand for the $P$ model $$ this decision will be taken at the beginning of year $2,$ will take effect immediately and cannot be reversed. Currently, the firm estimates the associated costs and revenues as shown in the following Table. Annual costs for the $H$ and $P$ technologies are denoted $C$^\{$H$\}$$ or $C$^\{$P$\}$$$,$ revenues from model $i$\backslash$in$\backslash$left$\backslash \{$H$,$P$\backslash$right$\backslash \}$$ in state $k$\backslash$in$\backslash$left$\backslash \{$S$,$N$\backslash$right$\backslash \}$$ for Subsidy $($$S$$)$ or No subsidy $($$N$$)$ are denoted $R$\_\{$k$\}^\{$i$\}$$$.$

If the firm switches to the plugin $($$P$$)$ model now, the new facility will not come onstream till next year; this year, the firm will pay the set$-$up cost $SC$ and the annual cost $C$^\{$H$\}$$ of producing the existing Hybrid $($$H$$)$ model and get revenues $R$\_\{$N$\}^\{$H$\}$$$.$ From next period onwards, the firm will pay annual cost $C$^\{$P$\}$$ and get the relevant revenues $($depending on the government's decision regarding the subsidy policy$)$forever$.$

a$.$ If the firm decides this year $($before the government decision is known$),$ what are the NPVs for the firm if i$)$ it stays with $H$ or ii$)$ it switches to $P$$,$ using the riskless rate for discounting? Which would the firm choose?

b$.$ Using the share price, compute the WACC corresponding to sticking with the H model. Using this for discounting, what are the NPVs for each model and which would the firm prefer?

c$.$ Using the WACC computed in part $($b$),$ how much would the company be willing to pay for an option to delay the model choice until next year, once the government$$s subsidy decision is known $($assume the setup cost is paid when the decision is taken, one period before the new revenue stream starts$)?$