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Simple Investment Strategy-Staged Investments. You have been retained to evaluate a major investment for a technology company. The cost of the...
Simple Investment Strategy-Staged Investments. You have been retained to evaluate a major investment for a technology company. The cost of the project is $100 million. If the project is successful, it will generate expected profits of $15 million per year forever, which has a present value of $150 million. However, there is a 50% chance that the project will be a complete failure, in which case it will generate no cash flows. Morever, if the project is successful, there will be a follow-on project that can be initiated the following year. The follow-on project will have a cost of $1 billion, and if things go well (probability of 50%), it will generate expected cash flows of $150 million per year that last forever foever and result in a value of $1.5 billion (in year 1 dollars). If the follow-on project is not succeeful, it will result ina stream of cash flows with a present value of $900 million. Should the initial project be taken? Explain your receommendation in commonsense terms to your boss, who is not a techie.
