Since your instructional dog agility DVDs titled "Super Zulu" sold so well, you have decided to make a comedy dog agility DVD titled "Baker Is Okay." Your press can either produce 50,000 DVDs at a cost of $35 per DVD or 150,000 DVDs at a cost of $45 per DVD.
If your DVD gets really favorable reviews, you will be able to sell it for $80 per copy.
If your DVD gets average reviews, you will sell it for $46 per copy. If your DVD gets no notice and no reviews, it will only be worth $10 per copy.
There is a 30% chance you will get favorable reviews, a 60% chance you will get average reviews, and a 10% chance you will get no notice. For simplicity, assume a 0% cost of capital and no additional costs. What is the expected profit of the project?
If you can wait to read the reviews before starting production, what is the value of the project? And what is the value of the real options?