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. Naughty Pine Lumber Company is evaluating a new saw with a life of two years. The saw costs $3,000, and future after-tax cash flows depend on demand for the company's pro- ducts. The tabular illustration of a probability tree of possible future cash flows associated with the new saw is as follows: YEAR I YEAR 2

. Naughty Pine Lumber Company is evaluating a new saw with a life of two years. The saw costs $3,000, and future after-tax cash flows depend on demand for the company's pro- ducts. The tabular illustration of a probability tree of possible future cash flows associated with the new saw is as follows: YEAR I YEAR 2

MATLAB: An Introduction with Applications
MATLAB: An Introduction with Applications
6th Edition
ISBN:9781119256830
Author:Amos Gilat
Publisher:Amos Gilat
Chapter1: Starting With Matlab
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1. Naughty Pine Lumber Company is evaluating a new saw with a life of two years. The saw costs $3,000, and future after-tax cash flows depend on demand for the company's pro- ducts. The tabular illustration of a probability tree of possible future cash flows associated with the new saw is as follows: YEAR I YEAR 2 CONDITIONAL PROBABILITY P(2 | 1) INITIAL NET NET PROBABILITY P(1) CASH FLOW CASH FLOW BRANCH $1,000 1,500 2,000 0.30 0.40 $1,500 0.40 2 0.30 3 1.00 0.40 2,000 4 2,500 3,000 0.60 2,500 0.40 0.20 1.00 6. 1.00 a. What are the joint probabilities of occurrence of the various branches? b. If the risk-free rate is 10 percent, what is (i) the net present value of each of the six com- plete branches, and (ii) the expected value and standard deviation of the probability distribution of possible net present values? c. Assuming a normal distribution, what is the probability that the actual net present value will be less than zero? What is the significance of this probability?
Transcribed Image Text:1. Naughty Pine Lumber Company is evaluating a new saw with a life of two years. The saw costs $3,000, and future after-tax cash flows depend on demand for the company's pro- ducts. The tabular illustration of a probability tree of possible future cash flows associated with the new saw is as follows: YEAR I YEAR 2 CONDITIONAL PROBABILITY P(2 | 1) INITIAL NET NET PROBABILITY P(1) CASH FLOW CASH FLOW BRANCH $1,000 1,500 2,000 0.30 0.40 $1,500 0.40 2 0.30 3 1.00 0.40 2,000 4 2,500 3,000 0.60 2,500 0.40 0.20 1.00 6. 1.00 a. What are the joint probabilities of occurrence of the various branches? b. If the risk-free rate is 10 percent, what is (i) the net present value of each of the six com- plete branches, and (ii) the expected value and standard deviation of the probability distribution of possible net present values? c. Assuming a normal distribution, what is the probability that the actual net present value will be less than zero? What is the significance of this probability?
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