Your Company Has a New Project to Be Considered

question 32

Essay

Your company has a new project to be considered.You are given the following information on the best guess of related outcomes for the project.The cost of developing and market testing the product over the next year is $225 million.If the test is successful,which has a 65% chance,the company will spend another $800 million to put the productive capabilities in place.The expected cashflows after tax for a successful project are $225 million each year for the next six years with a probability of .8; there is a 20% chance of a zero NPV.If the test fails the cashflows associated with continuing through the sixth year is $125 million per year after tax.The company uses a 12% discount rate for these types of projects.Draw and label the decision tree.Explain what decisions management would make at each node upon their realization.

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Definitions:

Capillary Refill

A test to assess blood circulation, where pressure is applied to a nail bed and the time is measured for color to return, indicating blood flow efficiency.

Nail

A small, slender piece of metal typically used as a fastener, peg, or spike.

Near Vision

The ability to see objects clearly at a close range, typically within a few inches to a few feet from the eyes.

Inches

A unit of measurement in the Imperial system equal to one-twelfth of a foot, commonly used to measure length.