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4. (20 points). Consider a Project X, we are not clear whether it will be a success. We will approach the project in two phases.
4. (20 points). Consider a Project X, we are not clear whether it will be a success. We will approach the project in two phases. Phase 1 (Research and pilot program) Takes 1 year, costs $125,000. There will be no revenue from Phase 1. Uncertainty related to Phase 1: The probability that Phase 1 will be successful is 50%. Phase 2 (Possible implementation in the 2nd year) - If Phase 1 is successful: invest $1 million which generates a one-time benefit of $2.5 million in the following year. If Phase 1 is not successful, do not invest and there will be no cost or revenue. Discount factor: 0.9 Calculate the PDV of expected net return of this project considering both two phases. 4. (20 points). Consider a Project X, we are not clear whether it will be a success. We will approach the project in two phases. Phase 1 (Research and pilot program) Takes 1 year, costs $125,000. There will be no revenue from Phase 1. Uncertainty related to Phase 1: The probability that Phase 1 will be successful is 50%. Phase 2 (Possible implementation in the 2nd year) - If Phase 1 is successful: invest $1 million which generates a one-time benefit of $2.5 million in the following year. If Phase 1 is not successful, do not invest and there will be no cost or revenue. Discount factor: 0.9 Calculate the PDV of expected net return of this project considering both two phases
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