FRS Ltd is considering undertaking a project, the cash flow outcome of which depends on
whether market demand proves to be weak (probability 0.25) or strong (probability 0.75).
Weak market demand will result in a negative cash flow of £180,000, while strong market
demand will give rise to a positive cash flow of £500,000.
A market research consultant has offered to prepare a forecast on whether the market
will be weak or strong for a fee of £80,000. Past experience with this firm indicates that
it has a 0.8 chance of correctly forecasting strong market demand and a 0.6 chance of
correctly forecasting weak market demand.
Requirements
(a) Advise FRS Ltd on whether or not the project is viable without the forecast.
(b) Advise FRS Ltd on whether or not the value of the forecast to FRS Ltd is greater or
less than the fee requested by the consultant.