11-17 a. The resulting decision tree is: NPV t = 0 t = 1 t = 2 t = 3 P NPV Product $3,000,000 0.24 $881,718 $211,612 ($1,000,000) P = 0.5 P = 0.80 1,500,000 0.24 (185,952) (44,628) ($500,000) P = 0.5 P = 0.60 100,000 0.12 (376,709) (45,205) ($10,000) P = 0.20 0 0.40 (10,000) (4,000) P = 0.40 1.00 Exp. NPV = $117,779 The NPV of the top path is: - - - $10,000 = $881,718. Using a financial calculator, input the following: CF 0 = -10000, CF 1 = -500000, CF 2 = -1000000, = 3000000, and I/YR = 12 to solve for NPV = $881,718.29 ≈ $881,718. The other NPVs were determined in the same manner. If the project is of average risk, it should be accepted because the expected NPV of the total project is positive. 3 ) 12 . 1 ( 000 , 000 , 3 $ 2 ) 12 . 1 ( 000 , 000 , 1 $ 1 ) 12 . 1 ( 000 , 500 $ CF3
11-17 a. The resulting decision tree is: NPV t = 0 t = 1 t = 2 t
= 3 P NPV Product $3,000,000 0.24 $881,718 $211,612 ($1,000,000) P
= 0.5 P = 0.80 1,500,000 0.24 (185,952) (44,628) ($500,000) P = 0.5
P = 0.60 100,000 0.12 (376,709) (45,205) ($10,000) P = 0.20 0 0.40
(10,000) (4,000) P = 0.40 1.00 Exp. NPV = $117,779 The NPV of the
top path is:
- - - $10,000 = $881,718.
Using a financial calculator, input the following: CF0 = -10000,
CF1 = -500000, CF2 = -1000000, = 3000000, and I/YR = 12 to solve
for NPV = $881,718.29 $881,718.
The other NPVs were determined in the same manner. If the
project is of average risk, it should be accepted because the
expected NPV of the total project is positive.
