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if the firm invests this year, it has an income stream earlier. but, if it invests next year, the firm obtains further information about the state of the economy, which can prevent it from investing with losses. the firm knows its discounted cash flows if it invests this year: m. if it invests next year
, the discounted cash flows are m with a % probability, and m with a % probability. assuming a risk neutral rate of %, future discounted cash flows are, in present terms, . m and . m, respectively. the investment cost is m. if the firm invests next year, the present value of the investment cost is ....
https://en.wikipedia.org/wiki/Real_options_valuation