The startup has a new product underdevelopment. The company is considering issuing a beta-version of the product to be actively tested by users. The facts are as follows:

To roll out the new beta version, the company will need to spend $1.0M. Although this will not happen immediately, it will be spent over the next year, for our purposes we can assume that the $1.0M will be spent immediately (t = 0). It will take a year to assess whether the product could be successful using market data from the beta-testers.

If the company decides it is likely to be successful (based on knowledge from the beta-testing and other market research over the coming year) it CAN spend $10M in total on a marketing campaign and final product development. This money will be spent in one year (t = 1) IF the company decides to continue. Note that this is a right, NOT an obligation.

The best analysis estimates that IF the final product is launched in one year the project will generate $500K of free cash flow in the second year; this cash flow will grow each year by 10%. The uncertainty as to the value of the future cash inflows can be modeled with a standard deviation of 40%. The appropriate cost of capital for this project is 15.0%.

The risk-free rate is 3.0%. AND the company will pay no dividends in the foreseeable future.

Given these facts, should we invest the $1.0M today to begin this process?