At Stage 2 of the Decision Tree It Shows That

question 66

Multiple Choice

At stage 2 of the decision tree it shows that if a project is successful,the payoff will be $53,000 with a 2/3 chance of occurrence. There is also the 1/3 chance of a $-24,000 payoff. The cost of getting to stage 2 (1 year out) is $44,000. The cost of capital is 15%. What is the NPV of the project at stage 1?

• A) $-13,275
• B) $-20,232
• C) $2,087
• D) $7,536
• E) Cannot be calculated without the exact timing of future cash flows

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Definitions:

Production Possibilities Frontier

A curve depicting all maximum output possibilities for two goods, given a set of inputs consisting of resources and other factors.

Marginal Cost

The cost incurred by producing one additional unit of a product.

Concave

A shape or curve that is curved inward, resembling the interior of a circle or sphere.

Production Possibilities Frontier

A curve depicting all maximum output possibilities for two goods, given a set of inputs and technology constraints.