A corporation is trying to decide whether to buy the patent for a productdesigned by another company. The decision to buy will require an investment of $8 million, and the demand for the product is not known. If demand is light, the company expects a return of $1.3 million each year for three years. If the demand is moderate, the return will be $2.5 million each year for four years, and high demand will mean a return of $4 million each year for four years. It is estimated that the probability of high demand is 0.4 and the probability of a light demand is 0.2. The firm's interest rate (risk-free) is 12%. Calculate the expected present worth of the investment. On this basis, should the company make the investment? (All figures represent after-tax values.)
A corporation is trying to decide whether to buy the patent for a product
designed by another company. The decision to buy will require an investment of $8 million, and the demand for the product is not known. If demand is light, the company expects a return of $1.3 million each year for three years. If the demand is moderate, the return will be $2.5 million each year for four years, and high demand will mean a return of $4 million each year for four years. It is estimated that the probability of high demand is 0.4 and the probability of a light demand is 0.2. The firm's interest rate (risk-free) is 12%. Calculate the expected present worth of the investment. On this basis, should the company make the investment? (All figures represent after-tax values.)
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