Use the Information for the Question(s)below

question 28

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 has the ability to sell the prototype in year one for $300,000,draw a decision tree detailing the Kinston Industries Mountain Bike Project.

---

Definitions:

Absolute Threshold

The minimum intensity of a stimulus required to be perceptibly recognized by an individual's senses.

Absolute Threshold

The minimum intensity level of a stimulus that an individual can detect at least 50 percent of the time.

Billboard

A large outdoor advertising structure typically found in high traffic areas, displaying commercials or public messages.

Typeface

The design or style of a set of characters, including letters and numbers, used in printing or displayed text.