Question
Suppose a firm has $300 million to invest in a new market. Given market uncertainty, the firm forecasts a high-scenario where the present value of
Suppose a firm has $300 million to invest in a new market. Given market uncertainty, the firm forecasts a high-scenario where the present value of the investment is $600 million, and a low-scenario where the present value of the investment is $200 million. Assume the firm believes each scenario is equally likely. Suppose that by waiting, the firm can learn with certainty which scenario will arise. If the firm waits one year and learns that high scenario will happen, its expected net present value of investment is $141.5 million.
Using the above information, calculate: (a) the annual discount rate; and (b) the difference in the expected net present value of investment between waiting a year and then invest and investing today.
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