Digital Inc. is considering production of a new cell
phone. The project would require an investment of $20 million. If the phone
were well received then the project would produce cash flows of $10 million a
year for 3 years but if the market did not like the product the cash flows
would be only $5 million per year. There is a 50 percent probability of both
good and bad market conditions. Digital could delay the project for a year
while it conducted a test to determine if demand would be strong or weak.
The delay would not affect either the project%u2019s cost or its cash flows. Digital%u2019s
WACC is 10 percent. What action would you recommend?
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