Decision Tree Analysis Shows a Project to Have Several Possible

question 19

Multiple Choice

Decision tree analysis shows a project to have several possible outcomes the best of which has an NPV of $12M calculated over a five-year life. This best case path has an overall probability of occurring of 20%. A real option is available at an initial cost of $800,000 which will add a single $6M cash inflow to this best case path at its end. The option doesn't have a significant effect on the project's risk. What is the option's value? The company's cost of capital is 12%.

• A)($3,404)
• B)$2,604,000
• C)($119,000)
• D)$274,000

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Definitions:

Phosphoglyceraldehyde (PGAL)

A three-carbon sugar molecule involved in the Calvin cycle of photosynthesis and also in glycolysis, a key step in cellular respiration.

Sugar Production

The process of extracting or synthesizing sugar from various sources for consumption.

Engelmann's Experiment

An experiment by Theodor Engelmann using a prism and algae to demonstrate the wavelength of light that photosynthesis is most efficient.

Accessory Pigments

Pigments in plants and algae that capture light energy and pass it to chlorophyll during photosynthesis, extending the range of light wavelengths that can be used.