Essay Answers

Qi)

Q ii)

With option ii the investor can choose to abandon to set up the company in period 0 and set up it in period 1 but not carry out any marketing study. This will make no sense since the time he/she decides to start the business the demand may be low. The only advantage with this option is that the investor will not lose or receive anything and therefore obtain the expected net present value.

When the investor chooses option one, that is, paying the set up cost in period 0 and setting up the company immediately in period 0, the demand for the product produced by the company in period 1 may be low and therefore lead to loses since he/she will have already paid the setup c

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