What is your optimal decision

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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?

Reference no: EM133008313

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