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:

Platelets

Small blood cells that play a crucial role in clotting, helping to stop bleeding by clumping and forming plugs in blood vessel injuries.

Hemophilia

A genetic disorder that impairs the body's ability to make blood clots, leading to excessive bleeding.

Venipunctures

The act of puncturing a vein with a needle for the purpose of drawing blood or for intravenous injection.

Blood Transfusion

The process of transferring blood or blood components from one person (donor) into another person’s bloodstream (recipient).