Decision Tree Analysis Shows a Project to Have Several Possible

question 58

Multiple Choice

Decision tree analysis shows a project to have several possible outcomes the best of which has an NPV of $10M calculated over a five year life. This best case path has an overall probability of occurring of 25%. A real option is available at an initial cost of $750,000 which will add a single $5M cash inflow to this best case path at its end. The option doesn't have a significant effect on the project's risk. The company's cost of capital is 11%. What is the option's value (to the nearest $1,000) ?

• A) ($8,000)
• B) $2,218,000
• C) $23,000
• D) $56,000

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Definitions:

Social Learning Theory

A theory proposing that people can learn new behaviors and attitudes through observation of others' actions and the consequences they face.

Environmental Influences

External factors, such as culture, climate, and family, that affect an individual's development and behavior.

Genetics

The study of genes, genetic variation, and heredity in living organisms, explaining how characteristics and conditions are passed from generation to generation.

Evolutionary Psychology

The theoretical approach to psychology that explains human behavior and mental processes in terms of how they may have been adapted for survival and reproductive success over evolutionary history.