Your company is planning on opening an office in Japan. Profits depend on how fast the economy in Japan recovers from its current recession. There is a 50% chance of recovery this year. You are trying to decide whether to open the office now or in a year. Construct the decision tree that shows the choices you have to open the office either today or one year from now.

Question

Want to see more full solutions like this?

Answer 1

Textbook Question

Chapter 22, Problem 1P

Your company is planning on opening an office in Japan. Profits depend on how fast the economy in Japan recovers from its current recession. There is a 50% chance of recovery this year. You are trying to decide whether to open the office now or in a year. Construct the decision tree that shows the choices you have to open the office either today or one year from now.

Expert Solution & Answer

Summary Introduction

To draw: The decision tree.

Introduction:

Decision tree is a tree-like graph which helps to identify strategies which are most likely to achieve goals. A decision tree comprises decision support tools.

Explanation of Solution

Given information:

A company is planning on opening an office in Japan. Company profit depends on Japanʼs economyʼs recovery from its current recession. The chance of recovery from recession is 50.00%.

Possible decision:

Possible decision in the decision tree:

1. To open office
2. To not open office

If to open office, then two possible decisions:

1. Economy recover
2. Economy doesn’t recover

If to not open office, then two possible decisions:

1. Economy recover
2. Economy doesn’t recover

If to not open office and economy recover, then two possible decisions:

1. To open office
2. To not open office

If to not open office and the economy does not recover, then two possible decisions:

1. To open office
2. To not open office

Diagram from decision tree:

EBK CORPORATE FINANCE, Chapter 22, Problem 1P

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Students have asked these similar questions

After a successful year for your beach shop, you are wondering whether to open one more store this year. There are equal chances for the coming summer to be rainy or sunny. If the weather is sunny, you will earn $55,000 in profits per store. However, if the weather is rainy, your profit will be $35,000 if you open one store and zero if you open two stores. What is your expected profit under complete information? O A $110,000 OB. $55,500 OC. $90,000 D. $72,500

You are thinking of pursuing an actuarial career, so you have agreed to serve as an intern at Love Actuaries LLP. The managing partner, Karen Thompson, has asked you to do some quick calculations for her. She wants you to use the current yield curve, flat at 6%, in your calculations. Client Annie Inc. has a pension plan that pays pension benefits annually at a rate of $10 million per year, starting one year from today. The pension obligation will end in 40 years. Karen wants to know the duration of these required pension payments. Client Billy Mack Co. wants to immunize its pension obligations (present value = $150 million with a duration of 22 years) with two $1000 face value bonds. The first bond is a 7-year 5% annual coupon bond issued by Jaime Corp. The second bond issuer, Kari Ltd., has issued a consol bond paying a 10% annual coupon perpetually. Ms. Thompson wants you to calculate the money Billy Mack should allocate to each of these bonds to immunize its pension against…

You are an advisor of Walton Hi-Tech Industry Limited (WHIL), a conglomerate based in Kaliakair, Bangladesh. Demand for your product has been high and you are looking at the following two alternative plans: Plan I: Spend $94 million today on a factory in Bhaluka, Mymensingh that will be completed in 1 year. You expect to receive $40 million in profits from this factory at the end of the second year, at which time you also expect to sell the factory to Sharp Corporation, a Japanese competitor, for a further $70 million. Plan II: Spend $120 million today in a joint venture with Jamuna Electronics. You expect to begin generating yearly profits of $13.5 million at the end of the first year and every year thereafter. You expect the joint venture to last forever. The market interest you could achieve from IDLC Finance if you do not invest in any of the two is 8.5%. Which of the above plans would you undertake if you could undertake just one. Explain this scenario with proper reasoning.

Answer 2

Textbook Question

Chapter 22, Problem 1P

Your company is planning on opening an office in Japan. Profits depend on how fast the economy in Japan recovers from its current recession. There is a 50% chance of recovery this year. You are trying to decide whether to open the office now or in a year. Construct the decision tree that shows the choices you have to open the office either today or one year from now.

Expert Solution & Answer

Summary Introduction

To draw: The decision tree.

Introduction:

Decision tree is a tree-like graph which helps to identify strategies which are most likely to achieve goals. A decision tree comprises decision support tools.

Explanation of Solution

Given information:

A company is planning on opening an office in Japan. Company profit depends on Japanʼs economyʼs recovery from its current recession. The chance of recovery from recession is 50.00%.

Possible decision:

Possible decision in the decision tree:

1. To open office
2. To not open office

If to open office, then two possible decisions:

1. Economy recover
2. Economy doesn’t recover

If to not open office, then two possible decisions:

1. Economy recover
2. Economy doesn’t recover

If to not open office and economy recover, then two possible decisions:

1. To open office
2. To not open office

If to not open office and the economy does not recover, then two possible decisions:

1. To open office
2. To not open office

Diagram from decision tree:

EBK CORPORATE FINANCE, Chapter 22, Problem 1P

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Answer 3

Textbook Question

Chapter 22, Problem 1P

Your company is planning on opening an office in Japan. Profits depend on how fast the economy in Japan recovers from its current recession. There is a 50% chance of recovery this year. You are trying to decide whether to open the office now or in a year. Construct the decision tree that shows the choices you have to open the office either today or one year from now.

Expert Solution & Answer

Summary Introduction

To draw: The decision tree.

Introduction:

Decision tree is a tree-like graph which helps to identify strategies which are most likely to achieve goals. A decision tree comprises decision support tools.

Explanation of Solution

Given information:

A company is planning on opening an office in Japan. Company profit depends on Japanʼs economyʼs recovery from its current recession. The chance of recovery from recession is 50.00%.

Possible decision:

Possible decision in the decision tree:

1. To open office
2. To not open office

If to open office, then two possible decisions:

1. Economy recover
2. Economy doesn’t recover

If to not open office, then two possible decisions:

1. Economy recover
2. Economy doesn’t recover

If to not open office and economy recover, then two possible decisions:

1. To open office
2. To not open office

If to not open office and the economy does not recover, then two possible decisions:

1. To open office
2. To not open office

Diagram from decision tree:

EBK CORPORATE FINANCE, Chapter 22, Problem 1P

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Answer 4

Textbook Question

Chapter 22, Problem 1P

Your company is planning on opening an office in Japan. Profits depend on how fast the economy in Japan recovers from its current recession. There is a 50% chance of recovery this year. You are trying to decide whether to open the office now or in a year. Construct the decision tree that shows the choices you have to open the office either today or one year from now.

Expert Solution & Answer

Summary Introduction

To draw: The decision tree.

Introduction:

Decision tree is a tree-like graph which helps to identify strategies which are most likely to achieve goals. A decision tree comprises decision support tools.

Explanation of Solution

Given information:

A company is planning on opening an office in Japan. Company profit depends on Japanʼs economyʼs recovery from its current recession. The chance of recovery from recession is 50.00%.

Possible decision:

Possible decision in the decision tree:

1. To open office
2. To not open office

If to open office, then two possible decisions:

1. Economy recover
2. Economy doesn’t recover

If to not open office, then two possible decisions:

1. Economy recover
2. Economy doesn’t recover

If to not open office and economy recover, then two possible decisions:

1. To open office
2. To not open office

If to not open office and the economy does not recover, then two possible decisions:

1. To open office
2. To not open office

Diagram from decision tree:

EBK CORPORATE FINANCE, Chapter 22, Problem 1P

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Answer 5

Textbook Question

Answer 6

Textbook Question

Answer 7

Expert Solution & Answer

Summary Introduction

To draw: The decision tree.

Introduction:

Decision tree is a tree-like graph which helps to identify strategies which are most likely to achieve goals. A decision tree comprises decision support tools.

Explanation of Solution

Given information:

A company is planning on opening an office in Japan. Company profit depends on Japanʼs economyʼs recovery from its current recession. The chance of recovery from recession is 50.00%.

Possible decision:

Possible decision in the decision tree:

1. To open office
2. To not open office

If to open office, then two possible decisions:

1. Economy recover
2. Economy doesn’t recover

If to not open office, then two possible decisions:

1. Economy recover
2. Economy doesn’t recover

If to not open office and economy recover, then two possible decisions:

1. To open office
2. To not open office

If to not open office and the economy does not recover, then two possible decisions:

1. To open office
2. To not open office

Diagram from decision tree:

EBK CORPORATE FINANCE, Chapter 22, Problem 1P

Answer 8

Expert Solution & Answer

Summary Introduction

To draw: The decision tree.

Introduction:

Decision tree is a tree-like graph which helps to identify strategies which are most likely to achieve goals. A decision tree comprises decision support tools.

Explanation of Solution

Given information:

A company is planning on opening an office in Japan. Company profit depends on Japanʼs economyʼs recovery from its current recession. The chance of recovery from recession is 50.00%.

Possible decision:

Possible decision in the decision tree:

1. To open office
2. To not open office

If to open office, then two possible decisions:

1. Economy recover
2. Economy doesn’t recover

If to not open office, then two possible decisions:

1. Economy recover
2. Economy doesn’t recover

If to not open office and economy recover, then two possible decisions:

1. To open office
2. To not open office

If to not open office and the economy does not recover, then two possible decisions:

1. To open office
2. To not open office

Diagram from decision tree:

EBK CORPORATE FINANCE, Chapter 22, Problem 1P

Answer 9

Expert Solution & Answer

Answer 10

Expert Solution & Answer

Answer 11

Summary Introduction

To draw: The decision tree.

Introduction:

Decision tree is a tree-like graph which helps to identify strategies which are most likely to achieve goals. A decision tree comprises decision support tools.

Answer 12

Explanation of Solution

Given information:

A company is planning on opening an office in Japan. Company profit depends on Japanʼs economyʼs recovery from its current recession. The chance of recovery from recession is 50.00%.

Possible decision:

Possible decision in the decision tree:

1. To open office
2. To not open office

If to open office, then two possible decisions:

1. Economy recover
2. Economy doesn’t recover

If to not open office, then two possible decisions:

1. Economy recover
2. Economy doesn’t recover

If to not open office and economy recover, then two possible decisions:

1. To open office
2. To not open office

If to not open office and the economy does not recover, then two possible decisions:

1. To open office
2. To not open office

Diagram from decision tree:

EBK CORPORATE FINANCE, Chapter 22, Problem 1P

Answer 13

Ch. 22.1 - What is the difference between a real option and a...Ch. 22.1 - Why does a real option add value to an investment...Ch. 22.2 - Prob. 1CC Ch. 22.2 - In what circumstances does the real option add...Ch. 22.2 - How do you use a decision tree to make the best...Ch. 22.3 - What is the economic trade-off between investing...Ch. 22.3 - Prob. 2CC Ch. 22.3 - Does an option to invest have the same beta as the...Ch. 22.4 - Why can a firm with no ongoing projects, and...Ch. 22.4 - Why is it sometimes optimal to invest in stages?

Explanation of Solution

Want to see more full solutions like this?

Chapter 22 Solutions

Additional Business Textbook Solutions