A technology company is considering investing in the development of a new software product. The development cost is estimated at $200,000. The market for this software is currently uncertain, and the company has the following options: 

The company can choose to invest immediately in the development. If the market is favorable, the project will generate revenue of $500,000. However, if the market turns out to be unfavorable, the project will only bring in $100,000. Currently, the probability of a favorable market is estimated at 0.5, and an unfavorable market at 0.5. 

The company can choose to wait for a year to gather more information about the market. After one year, the uncertainty will be resolved, and the company will know with certainty whether the market is favorable or not. However, waiting for a year means that the expected cash flows from the project will be discounted due to the delay. Assume a discount rate of 10% per annum.

Required

 a. Calculate the Expected Value (EV) of investing in the project immediately. 

b. Calculate the EV of waiting for one year, taking into account the discounting of future cash flows.

Answer rating: 100% (QA)

a Calculate the EV of investing immediately Favorable market probability 05 Revenue ... View the full answer