The management of InnoConf Ltd is evaluating whether to invest $250,000 in the development of...
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The management of InnoConf Ltd is evaluating whether to invest $250,000 in the development of a new conferencing software. The development will take two years to complete. However, management believes that there is only a 30 percent chance that a commercially viable conferencing software will be produced. If successful, the project will earn the company a net cash inflow of $8,000 per annum in perpetuity if the demand is high and $5,000 if the demand is low(with the first cash inflow occurring at t=3).The probability of a high demand for the webcam is 40 percent and the probability of a low demand is 60 percent. Required rate of return on this project is 15 percent per annum.
Required:
Should the project proceed? Explain and justify your answer with necessary calculations.
Note: you do NOT have to provide the decision tree.
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