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A drug company is considering investing $100 million today to bring a weight loss pill to...

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 dollars 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 price or a low price. The firm will not invest if it learns that the pill will sell at a low price. What is the option value of waiting one year to make the investment?
$17.44 million
$46.4 million
$8.1 million
$10 million
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Answer #1

The answer is $17.44 million. For detailed solution please refer the image attachedPIO0 milion Ameurt to be mted Expocted pre erater angy $37 miltion xo t $miition Xo S $18.5milion t60.5mallion $19 milion Thr

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