A Start-Up Company Is Making a Decision on Whether to Develop

question 10

Multiple Choice

A start-up company is making a decision on whether to develop a new internet social networking site. The site will cost $1 million to develop, but it is unclear whether the new technology critical to the site will work correctly. If development is successful, it will cost an additional $20 million next year to advertise the site to Internet users. If the site becomes popular with Internet users, it is expected to generate a present value of $100 million in advertising revenue. There is a 10 per cent chance that the site will be successfully developed and subsequently become popular with Internet users. The company's cost of capital is 15 per cent. Should the company pursue the project?

• A) No, the project has a negative NPV.
• B) Yes, the project has a positive NPV.
• C) It doesn't matter. The project has zero NPV.
• D) There is not enough information to make a decision.

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Definitions:

Tenth Amendment

The Tenth Amendment to the United States Constitution reserves all powers not delegated to the federal government to the states or to the people.

International Law

International law comprises the rules and agreements that govern the relations between countries, including treaties, conventions, and customary laws.

National Law

Law that relates to a particular nation, as opposed to international law.

Treaty

A formal agreement between two or more sovereign states concerning trade, peace, or other mutual cooperation.