Wendt Publishing is considering a proposed project. The company estimates that if it invests in the project today, the project's estimated NPV is $20 million, but there remains a lot of uncertainty about the project's profitability.
As an alternative to making the investment today, the company is considering waiting a year. In particular, it is considering spending some money today to collect additional information, which would enable the firm to make a better assessment of the project's value one year from now. Wendt believes that if it waits a year, there is a 50 percent chance the information collected will be positive and the project's expected NPV one year from now (not including the cost of obtaining the information) will be $55 million. There is also a 50 percent chance the information collected will be negative and the project's expected NPV one year from now (not including the cost of obtaining the information) will be -$15 million.
If the company chooses to collect additional information, the costs of collecting this information will be incurred today. Moreover, if the company chooses to wait a year, it has the option to invest or not invest in the project after receiving the information about the project's prospects. Assume that all cash flows are discounted at 10 percent. What is the maximum amount of money the company would be willing to spend to collect this information?

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The Answer of Wendt Publishing is considering a proposed project. The company estimates that if it invests in the project today, the project's estimated NPV is $20 million, but there remains a lot of uncertainty about the project's profitability.
As an alternative to making the investment today, the company is considering waiting a year. In particular, it is considering spending some money today to collect additional information, which would enable the firm to make a better assessment of the project's value one year from now. Wendt believes that if it waits a year, there is a 50 percent chance the information collected will be positive and the project's expected NPV one year from now (not including the cost of obtaining the information) will be $55 million. There is also a 50 percent chance the information collected will be negative and the project's expected NPV one year from now (not including the cost of obtaining the information) will be -$15 million.
If the company chooses to collect additional information, the costs of collecting this information will be incurred today. Moreover, if the company chooses to wait a year, it has the option to invest or not invest in the project after receiving the information about the project's prospects. Assume that all cash flows are discounted at 10 percent. What is the maximum amount of money the company would be willing to spend to collect this information?

Wendt Publishing Is Considering a Proposed Project