Reference no: EM133008313

Question - You are trying to decide whether to make an investment of $410 million (initial investment cost) in a new technology to produce Everlasting Gobstoppers. The size of the market will become clear one year from now. There is a 60% chance that the market for these candies will produce profits of $100 million annually in perpetuity, and a 40% chance the market will produce profits of $51 million. Currently, the cost of capital of the project is 11,2% per year. If you invest now, the cost of capital can be fixed at 11,2% per year. If you invest one year from now, there is a 20% chance that the cost of capital will drop to 8,9% in a year, and an 80% chance that it will stay at 11,2% forever. Movements in the cost of capital are unrelated to the size of the candy market. What is your optimal decision? Make the investment either today or one year from now?