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1. You are considering setting up a firm to produce widgets. The cost of the...

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1. You are considering setting up a firm to produce widgets. The cost of the project is $20 million today. The demand for widgets is uncertain. It can be either high or low with equal probability. When the demand is high cash flows in t = 1 are $66 million and when the demand is low cash flows in t 1 are $34 million. The discount rate is 10%. a) What is the NPV of the project? b) Suppose you can commission a study that tells you whether the demand for widgets will be high or low. The study takes one year to complete. That is, if you commission the study you must decide in t = 1 whether to invest. If you invest the cash flows will arrive in t = 2, What is the maximum amount you are willing to pay for the study today? c) Should you invest today or conduct the study and wait for a year? What are the benefits of the study? What are the costs of the study

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