A risk-neutral entrepreneur owns a production unit that currently generates annual profits of $15 mln. In a year from now, the annual pro ts may go up or down by 10% and will remain constant thereafter. Assume that a risk-neutral probability of the pro ts going up is 0.6 (respectively, the risk-neutral probability of the pro ts going down is 0.4). The entrepreneur contemplates an irreversible investment of I mln into a product innovation technology which will increase the annual pro ts by 15% a year after the investment was made. The annual risk-free interest rate is r = 0:01.