You are considering whether to conduct a test today of a project that you are considering. The test costs $20,000 today. If the test is successful with a probability of 0.6 you can invest $100,000 at time 1 & earn $66,000 a year for years 2 to 5. If the test is unsuccesful (probability 0.4) and you invest a time 1, the NPV of the project at that time will be -$20,000. If you do not invest at time 1, the NPV is 0. The discount rate is 17%
If the test is a success, what is the NPV of the project at time 1?
If the test is a failure will you invest in the project at time 1 and why?
Given your answers to 15 & 16, what is the “expected value” of the investment at time 1?
Should you invest in the test today (time 0)? Please provide numerical support of your decision.
