You are evaluating a product. The market demand for the product can be low or high.
The product requires an investment of $1000.
If the market demand is high, the product will have a payoff of $2000. If the market demand is low, the product will have payoff of $840.
You do not know whether the market demand is high or low, but you know the probability that the market demand will be high is 70%, and that it will be low is 30%.
Given the above information, you calculate the NPV to be:
(0.7*2000 + 0.3*840) – 1000
Now, a market research organization offers to a survey to determine whether the demand will be high or low BEFORE you make the 1000 investment.
What is the value of the survey to you? That is, the maximum amount you would be ready to pay to have the survey conducted?