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A Firm Is Considering the Development of a New Technology

question 47

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 .35, .25, .15, .07, and .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:

Full Release

A legal agreement in which one party permanently relinquishes all claims against another.

Novation

The process of replacing one obligation with another by mutual agreement.

Entire Agreement

A clause in a contract that declares the contract to be the complete and final agreement between the parties, superseding all prior negotiations, promises, or representations.

Privity of Contract

The principle that a contract directly affects and grants enforceable rights only to the parties involved in the contract agreement.

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