Question

2. Consider a simple three period model, period 0, period 1, period 2. A company is considering whether to invest in a low-carbon technology. The technology investment can take place in either period 0 or period 1, but not in priod 2. The cost of the technology is: I-$100, which is the same whether the investment takes place in period 0 or period 1. If installed, the technology will generate a one-time return in the following period; the magnitude of the return depends on market situations: with a probability of 0.6, the return will be: Rh-200, with a probability of 0.4, the return will be: RI-50. The market situations will be known in period 1. The company has two choices in period 0: A. Install the technology in period 0: B. Do not install the technology in period 0, but wait to make the investment decision in period 1I when the market situations are known. Please calculate and show whether A or B will generate a higher net present discounted value for the company. Assume a discount factor: D 0.9

Answer 1

Option A rerns realizet Invexfment done in period o in period Preient orth of op Hion A Present value of Beneft- PresenE val of cost 26 fw in option A =26 Option K invet in time 1 wart ot time o Present werth of option 3 optionA to be chosen over vrtionF