Information Value (L.O.2): Arch & Veronica Corp. is evaluating whether to obtain a franchise for a pocket telephone system. The costs of the franchise and other investments total $30 million. If the franchise is successful, Arch & Veronica will have a project with a present value of future cash flows of $250 million (that is, before deducting the initial investment cost). The probability of success is .4. If the franchise is not successful. the present value of the future cash inflows will be $35 million. Manny, Moe & Jack Marketing Corp. offered to conduct a survey for Arch & Veronica which could inform them more precisely whether the franchise would be successful. Manny, Moe & Jack provide the following probabilities for their reports:

(Note: No probability revisions are required.)

Required:

a. What is the maximum price, if anything. Arch & Veronica would be willing to pay Manny. Moe & Jack to conduct the marketing study?

b. If the unsuccessful outcome were to have a negative present value of $50 million. which does include loss of the initial investment, what is the maximum price Arch & Veronica would be willing to pay Manny, Moe & Jack to conduct the marketing study?

c. If the answers to part

a. and part

b. differ, explain why.?

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where G = Good report. B S = Bad report. Successful franchise. Pr(G)= .5