Determine whether demand will be strong or weak

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INVESTMENT TIMING OPTION Digital Inc. is considering the production of a new cell phone. The project will require an investment of $20 million. If the phone is well-received, the project will produce cash flows of $10 million a year for 3 years; but if the market does not like the product, the cash flows will be only $5 million per year. There is a 50% probability of both good and bad market conditions. Digital can delay the project a year while it conducts a test to determine whether demand will be strong or weak. The delay will not affect the dollar amounts involved for the project's investment or its cash flows-only their timing. Digital's WACC is 10%. What action do you recommend?

Reference no: EM131116761

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