 If Diplomat goes ahead with this project today, it willobtain knowledge that will give rise to additional opportunities 5years from now (at t = 5). The company can decide at t = 5 whetheror not it wants to pursue these additional opportunities. Based onthe best information available today, there is a 35% probabilitythat the outlook will be favorable, in which case the futureinvestment opportunity will have a net present value of $6 millionat t = 5. There is a 65% probability that the outlook will beunfavorable, in which case the future investment opportunity willhave a net present value of -$6 million at t = 5. Diplomat.com doesnot have to decide today whether it wants to pursue the additionalopportunity. Instead, it can wait to see what the outlook is.However, the company cannot pursue the future opportunity unless itmakes the $3 million investment today. What is the estimated netpresent value of the project, after consideration of the potentialfuture opportunity?
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