You are considering whether to conduct a test today of a project that you are considering. The
Question:
You are considering whether to conduct a test today of a project that you are considering. The test costs $20,000 today. If the test is successful with a probability of 0.6 you can invest $100,000 at time 1 & earn $66,000 a year for years 2 to 5. If the test is unsuccesful (probability 0.4) and you invest a time 1, the NPV of the project at that time will be -$20,000. If you do not invest at time 1, the NPV is 0. The discount rate is 17%
If the test is a success, what is the NPV of the project at time 1?
If the test is a failure will you invest in the project at time 1 and why?
Given your answers to 15 & 16, what is the "expected value" of the investment at time 1?
Should you invest in the test today (time 0)? Please provide numerical support of your decision.
Behavioral Finance Psychology Decision-Making and Markets
ISBN: 978-0324661170
1st edition
Authors: Lucy Ackert