posted by Otis .
Willamette Forests is considering a new software package that may improve productivity over the next 2 years. There is a sixty percent chance that the project will be a success in year 1 earning 2 million and a forty percent change that the venture will fail during the first year resulting in a 1 million loss due to worse asset management than under the current system. The original system would be reinstalled, resulting in no additional losses during the second year.
If the project is a success in the first year, there is an eighty percent chance that it will earn 3 million in the second year. There is a twenty percent chance that the software will be ineffective in year 2, despite success in year 1, in which case there would be a loss of 500,000. Assuming a nine percent required rate of return on these, and a total cost of the software system of 500,000, should Willamette install the new system?