Your company has a new project to be considered. You are given the following information on the best guess of related outcomes for the project. The cost of developing and market testing the product over the next year is $225 million. If the test is successful, which has a 65% chance, the company will spend another $800 million to put the production capabilities in place. The expected cash flows after tax for a successful project are $225 million each year for the next six years with a probability of.8; there is a 20% chance of a zero NPV. If the test fails the cash flows associated with continuing through the sixth year are $125 million per year after tax. The company uses a 12% discount rate for these types of projects. Draw and label the decision tree. Explain what decisions management would make at each node upon their realization.

Your company has a new project to be considered. You are given the following information on the best guess of related outcomes for the project. The cost of developing and market testing the product over the next year is $225 million. If the test is successful, which has a 65% chance, the company will spend another $800 million to put the production capabilities in place. The expected cash flows after tax for a successful project are $225 million each year for the next six years with a probability of.8; there is a 20% chance of a zero NPV. If the test fails the cash flows associated with continuing through the sixth year are $125 million per year after tax. The company uses a 12% discount rate for these types of projects. Draw and label the decision tree. Explain what decisions management would make at each node upon their realization.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

Your company has a new project to be considered. You are given the following information on the
best guess of related outcomes for the project. The cost of developing and market testing the
product over the next year is $225 million. If the test is successful, which has a 65% chance, the
company will spend another $800 million to put the production capabilities in place. The expected
cash flows after tax for a successful project are $225 million each year for the next six years with a
probability of.8; there is a 20% chance of a zero NPV. If the test fails the cash flows associated with
continuing through the sixth year are $125 million per year after tax. The company uses a 12%
discount rate for these types of projects. Draw and label the decision tree. Explain what decisions
management would make at each node upon their realization.

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