A company can invest in a widget factory. If the investment is made, the factory is built instantaneously and the company can produce one widget per year forever, starting immediately. Currently (at t=0 ), the price of a widget is $200. Operating costs are zero. Next year (at t=1 ) the price of widgets will be either $100 or $300 with equal probability and will remain constant forever thereafter. The risk over the future widget price is fully diversifiable. The riskfree rate is 10%. The company can invest either at t=0 or wait and take an investment decision at t=1 after uncertainty about the widget price has been resolved. The cost of building the factory is $1600, regardless of whether the investment is made now or at t=1. The investment decision is not reversible. That is, if the company decides to sell the factory in the future, it cannot recover any of its initial investment. What is the NPV of investing in the factory today (at t=0 )? NPV=I+(1+r)tCFt=1600+0,12001,1=600 Since the widget will increase Consider the setting in Question 1. What is the NPV (as of t=0 ) of waiting and taking an investment decision at t=1 closest to? A company can invest in a widget factory. If the investment is made, the factory is built instantaneously and the company can produce one widget per year forever, starting immediately. Currently (at t=0 ), the price of a widget is $200. Operating costs are zero. Next year (at t=1 ) the price of widgets will be either $100 or $300 with equal probability and will remain constant forever thereafter. The risk over the future widget price is fully diversifiable. The riskfree rate is 10%. The company can invest either at t=0 or wait and take an investment decision at t=1 after uncertainty about the widget price has been resolved. The cost of building the factory is $1600, regardless of whether the investment is made now or at t=1. The investment decision is not reversible. That is, if the company decides to sell the factory in the future, it cannot recover any of its initial investment. What is the NPV of investing in the factory today (at t=0 )? NPV=I+(1+r)tCFt=1600+0,12001,1=600 Since the widget will increase Consider the setting in Question 1. What is the NPV (as of t=0 ) of waiting and taking an investment decision at t=1 closest to