A drug company is considering investing $100 million today to bring a weight loss pill to the market. At the end of one year, the firm will know the payoff; there is a 0.50 probability that the pill will sell at a high price and generate $37 million per year of profit forever and a 0.50 probability that the pill will sell at a low price and generate $1 million per year of profit forever. The interest rate is 10%. Suppose the firm decides to wait one year to determine whether the pill will sell at a high or low price. The firm will not invest if it learns that the pill will sell at a low price. What is the net present value of waiting one year to make the investment? $122.72 million $64.5 million $201.22 million $88 million
A drug company is considering investing $100 million today to bring a weight loss pill to the market. At the end of one year, the firm will know the payoff; there is a 0.50 probability that the pill will sell at a high price and generate $37 million per year of profit forever and a 0.50 probability that the pill will sell at a low price and generate $1 million per year of profit forever. The interest rate is 10%. Suppose the firm decides to wait one year to determine whether the pill will sell at a high or low price. The firm will not invest if it learns that the pill will sell at a low price. What is the net present value of waiting one year to make the investment? $122.72 million $64.5 million $201.22 million $88 million
Chapter7: Uncertainty
Section: Chapter Questions
Problem 7.7P
Question
![A drug company is considering investing $100 million today to bring a weight loss pill to the market. At the end of one
year, the firm will know the payoff; there is a 0.50 probability that the pill will sell at a high price and generate $37 million
per year of profit forever and a 0.50 probability that the pill will sell at a low price and generate $1 million per year of profit
forever. The interest rate is 10%. Suppose the firm decides to wait one year to determine whether the pill will sell at a high
or low price. The firm will not invest if it learns that the pill will sell at a low price. What is the net present value of waiting
one year to make the investment?
$122.72 million
$64.5 million
$201.22 million
$88 million](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fa60c7212-17d5-40c0-a51d-7b7563faeee8%2F45c1f023-3210-41f1-b816-dcd78070fcd5%2Fn5sn5ea_processed.jpeg&w=3840&q=75)
Transcribed Image Text:A drug company is considering investing $100 million today to bring a weight loss pill to the market. At the end of one
year, the firm will know the payoff; there is a 0.50 probability that the pill will sell at a high price and generate $37 million
per year of profit forever and a 0.50 probability that the pill will sell at a low price and generate $1 million per year of profit
forever. The interest rate is 10%. Suppose the firm decides to wait one year to determine whether the pill will sell at a high
or low price. The firm will not invest if it learns that the pill will sell at a low price. What is the net present value of waiting
one year to make the investment?
$122.72 million
$64.5 million
$201.22 million
$88 million
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