Question
A solar energy firm is trying to introduce a more efficient solar module. It needs to invest $3000 in research and development (R&D) for the
A solar energy firm is trying to introduce a more efficient solar module. It needs to invest $3000 in research and development (R&D) for the technology to be viable in the present year. The firm can start production in next year. There is a 50% chance that the solar market will improve next year and revenues will increase to $750 per year in perpetuity. There is a 50% chance that the solar market will become depressed and revenues would drop to $200 per year in perpetuity. The annual cost of producing the new modules is expected to be $250. Should the solar company conduct the R&D on this new module technology in the present year? Assume a discount rate of 10%.
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