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 cost F.
Choosing option three will make the investor carry some marketing study to know whether or not the demand for the product is high. This will make him/her choose rightly whether or not to start the company in period 1. Here the investor may lose something and therefore not get the expected net present value. With this option, the investor will have a certainty of the demand conditions in the market. This makes this option to be the optimal option.
The marketing study will help the investor determine whether there will be a high or low demand for the product. If the investor finds that the demand will be low, he/she might choose to abandon setting up the company and wait until the demand is high. If he/she finds that the demand will be high, then it will be wise for him or her to start the company following the fact that there will be high profits due to high demand.
If M=0 then it means that there will be no cost to be spent on marketing study; hence option iii will be the optimal option. The investor will carry out the marketing study for free, and he/she will know whether the demand is high or low to start a company. This will be advantageous because for option one may start the company in period zero and find later that the demand is low leading to losses. For option two the only advantage is obtaining the expected net present value but have no idea about the demand in the market.
Abandoning the opportunity to set up the company in either period 1 or period 0 will only have the advantage of obtaining the expected net present value, but the investor will not know whether the demand is high or low. Assuming that the cost of carrying market study is 0, it means that no cost will be incurred and hence the investor will have added advantage as to whether to start a company or wait according to the demand in the market. Therefore, the expected net value obtained by choosing to commission market study and wait until period 1 to decide whether or not to set the company will always be the best