Example 3-2b: Due to your established brand name as the leading Internet bookstore you have the opportunity to expand into Internet sales of CDs a year from now. By that time you have also learned perfectly consumers’ attitude towards the Internet. The expansion investment costs $2,000M and generates the following cash flows each year forever starting at t=2:
Given that you have already invested in the Internet bookstore, should you expand into CD sales (t=1 decision)? Should you invest in the Internet bookstore in the first place (t=0 decision)?
Positive 0.5 Boom 0.6 $300M Recession 0.4 $100M
Negative 0.5 Boom 0.6 $0M Recession 0.4 $0M