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.

---

Definitions:

Last Month

Refers to the month immediately preceding the current month, used in reporting and analysis to compare recent performance or activity.

Materials Price Variance

The difference between the actual cost of materials used in production and the standard cost multiplied by the actual quantity of materials used.

Materials Quantity Variance

This variance measures the difference between the actual quantity of materials used in production and the expected quantity, multiplied by the standard cost per unit of material.

Safety Suits

Specialized protective clothing designed to safeguard the wearer from hazardous conditions or substances in various work environments.