Suppose that a firm is considering an investment opportunity. If the economy is...
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Finance
Suppose that a firm is considering an investment opportunity.
- If the economy is boom, the investment will be worth $345NPV today.
- If the economy is in recess, the investment will be worth $-102 NPV today.
The probably distribution is as follows:
| Scenario | Probability |
| Boom | 0.4 |
| Recess | use 1 minus the above probability |
Assume that the firm has an option to wait to decide the investment until they know the status of the economy, how much is the wait option worth?
Hint: calculate the project NPV under the wait option. Then use the new NPV minus the project NPV without the existence of the wait option.
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