ou are an investor in a start-up company that has a patent on a new medical device. It has been approved by the FDA and is now going to marketing. The venture capital group supporting the venture believe the device will enjoy an excellent market reception, a decent reception, or a very poor reception with probabilities 0.3, 0.5, and 0.2, respectively. As an investor, you have three options available to you: (1) you can go with the market ride where the return to you in profit will be $80K, $30K, or -$25K, respectively, for the three possible market receptions. (2) You can “pool” your investment with others, sharing both the good and the bad outcomes, and your profits would be $60K, $20K, or $0K, respectively. Finally, (3) you could sell your investment for cash; the current market value of your investment is $30K. Assume you are an expected return maximizer and ignore the time value of money when answering the following questions. Which of the three options is the most attractive? What is the maximum you would pay for perfect information about the future sales of this device?
You are an investor in a start-up company that has a patent on a new medical device. It has been approved by the FDA and is now going to marketing. The venture capital group supporting the venture believe the device will enjoy an excellent market reception, a decent reception, or a very poor reception with probabilities 0.3, 0.5, and 0.2, respectively. As an investor, you have three options available to you: (1) you can go with the market ride where the return to you in profit will be $80K, $30K, or -$25K, respectively, for the three possible market receptions. (2) You can “pool” your investment with others, sharing both the good and the bad outcomes, and your profits would be $60K, $20K, or $0K, respectively. Finally, (3) you could sell your investment for cash; the current market value of your investment is $30K. Assume you are an expected return maximizer and ignore the time value of money when answering the following questions.
- Which of the three options is the most attractive?
- What is the maximum you would pay for perfect information about the future sales of this device?
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