Use the Information for the Question(s)below

question 50

Essay

Use the information for the question(s)below.
Kinston Industries has come up with a new mountain bike prototype and is ready to go ahead with pilot production and test marketing.The pilot production and test marketing phase will last for one year and cost $500,000.Your management team believes that there is a 50% chance that the test marketing will be successful and that there will be sufficient demand for the new mountain bike.If the test-marketing phase is successful,then Kinston Industries will invest $3 million in year one to build a plant that will generate expected annual after-tax cash flows of $400,000 in perpetuity beginning in year two.If the test marketing is not successful,Kinston can still go ahead and build the new plant,but the expected annual after-tax cash flows would be only $200,000 in perpetuity beginning in year two.Kinston has the option to stop the project at any time and sell the prototype mountain bike to an overseas competitor for $300,000.Kinston's cost of capital is 10%.
-Assuming that Kinston does not have the ability to sell the prototype in year one for $300,000,draw a decision tree detailing the Kinston Industries Mountain Bike Project.

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Definitions:

Ethical Aspects

Considerations related to morality, principles, and values guiding behavior in the conduct of individuals or organizations.

Structured Programs

Computer programs designed with clear, organized sections that follow a specific sequence of operations or instructions.

Decision Making

The act of choosing between two or more courses of action or solutions to a problem in various contexts, including personal, professional, and societal.

Susceptible

Easily influenced or harmed by something; having a vulnerability or tendency to be affected by a particular condition or influence.