Question 3

A company considers paying to a government today 500 Euros in order to buy the exclusive rights to make an investment. The investment can be delayed (but it can be made only once). The revenues (received when the investment is made) are a function of the time T the company waits: rev(T)= 2000* (1 + ) . The operating cost of the investment (paid once) grows continuously with time: cost(T)= 1800*exp(0.10T). The continuous cost of capital is 10% and all the above are after taxes. Should the company go ahead and pay today 500 to purchase the rights to this investment? Remember differentiation rules.