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:

Capitalism

Capitalism is an economic system characterized by private ownership of the means of production, market-based allocation of resources, and the creation of goods and services for profit.

Private Enterprise System

An economic system where private individuals or businesses own capital goods and the production of goods and services is based on supply and demand in the general market.

Intellectual Inputs

Contributions of knowledge, ideas, expertise, and intellectual property to a project, organization, or production process.

Physical Labor

Physical labor refers to work that requires physical effort or manual tasks as opposed to mental work.