Should a risk neutral firm invest or not

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Reference no: EM13198443

A firm is considering launching a new product. The launch will require an investment of $10 million. The launch is risky because the demand could turn out to be either low or high. If the demand is high, the investment would give a return of $30 million, and if the demand is low, the return would be 0, (leading to a negative net payoff). If the firm does not launch the product, the payoff is 0.

a. Should a risk neutral firm invest or not? Explain your answer using a decision tree.

b. If the firm could employ a market research firm that would find out the level of demand before the
firm invests, how much would it be willing to pay to the market research firm (assume that the payment has to be made before the market research firm discloses its results).

c. Should the firm invest if it's utility of $W million is sqrt(W +10) (measured in million dollars)?

Reference no: EM13198443

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