Contemporary Engineering Economics 6th Edition by Chan Park

تمرين 9

A company is planning to undertake an investment of $2 million to upgrade one of its products for an emerging market. The market is highly volatile, but the company owns a product patent that will protect it from competitive entry until the next year. Because of the uncertainty of the demand for the upgraded product, there is a chance that the market will be in favor of the company. The present value of expected future cash flows is estimated to be $1.9 million. Assume a risk-free interest rate of 8% and a standard deviation of 40% per annum for the PV of future cash flows. What is the value of delaying the investment rather than canceling the product.