Kristina has a new shoe project which requires an investment of $12 million over one year after which there is a 25% chance of aborting at zero extra cost and an 75% chance of further development over three years at a cost of a further $25 million. At this point you estimate a 50% chance of making net profit of $90 million, a 40% change of making a net profit of $60 million and a 10% chance of making only $20 million. Your discount rate is 6%. Create a decision tree that illustrates these choices and calculate the NPV given the assumptions in the question. Should you go ahead?
Kristina has a new shoe project which requires an investment of $12 million over one year after which there is a 25% chance of aborting at zero extra cost and an 75% chance of further development over three years at a cost of a further $25 million. At this point you estimate a 50% chance of making net profit of $90 million, a 40% change of making a net profit of $60 million and a 10% chance of making only $20 million. Your discount rate is 6%. Create a decision tree that illustrates these choices and calculate the NPV given the assumptions in the question. Should you go ahead?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Kristina has a new shoe project which requires an investment of $12 million over one
year after which there is a 25% chance of aborting at zero extra cost and an 75%
chance of further development over three years at a cost of a further $25 million. At
this point you estimate a 50% chance of making net profit of $90 million, a 40%
change of making a net profit of $60 million and a 10% chance of making only $20
million. Your discount rate is 6%. Create a decision tree that illustrates these choices
and calculate the NPV given the assumptions in the question. Should you go ahead?
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