A Decision Tree Shows a 30 Percent Probability of $2

question 107

Multiple Choice

A decision tree shows a 30 percent probability of $2 million in returns and a 70 percent chance of $1 million in returns.What is the maximum you would invest today in this project if the cash in-flow occurs one year in the future and the discount rate is 10 percent?

• A)$818,182
• B)$1,181,818
• C)$1,300,000
• D)$1,363,636 NPV = - investment
• 0 = - investment

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Definitions:

Cost-To-Benefit Analysis

A systematic approach to estimating the strengths and weaknesses of alternatives in terms of costs and benefits.

Numeric Ratio

A comparative figure showing the relative sizes of two quantities expressed as a quotient.

Written Analysis

The process of critically evaluating or discussing a subject in written form to understand its components or relationships.

Bins

Storage containers or categories used in data analysis for grouping data points, or in physical organization to sort items.