A Firm Is Considering the Development of a New Technology

question 16

Essay

A firm is considering the development of a new technology with a declining probability of success in each research stage.The firm's researchers have estimated the probabilities at 0.35,0.25,0.15,0.07,and 0.01 for the various stages.The profit the firm would receive for successful development is $100 million,while the cost of research in each period is $10 million.How many investment stages should the firm undertake before abandoning the project?

---

Definitions:

Novation

The process of replacing an existing obligation with a new one, substituting a party or terms in a contract with the consent of all parties involved.

Rules of Interpretation

Guidelines and principles used to determine the meaning and intention of legal texts and statutory provisions.

Doctrine of Privity

A principle in contract law stating that contracts are binding only upon the parties signing the contract and no third party can enforce or be bound by the contract.

Contract Law

The body of law that governs the formation, enforcement, and interpretation of contractual agreements.