11-8A. (Probability trees) Sega, Inc. is considering expanding its operations into computer-based lacrosse games. Sega feels that there is a three-year life associated with this project, and it will initially involve an investment of $100,000. It also believes there is a 60 percent chance of success and a cash flow of $100,000 in year I and a 40 percent chance of failure and a $10,000 cash flow in year I. If the project fails in year I, there is a 60 percent chance that it will produce cash flows of only $10,000 in years 2 and 3. There is also a 40 percent chance that it will really fail and Sega will earn nothing in year 2 and get out of this line of business, with the project terminating and no cash flow occurring in year 3. If, conversely, this project succeeds in the first year, then cash flows in the secQnd year are expected to be $200,000, $175,000, or $150,000 with probabilities of

.30, .50, and .20, respectively. Finally, if the project succeeds in the third and final year of operation, the cash flows are expected to be either $30,000 more or $20,000 less than they were in year 2, with an equal chance of occurrence.

a. Construct a probability tree representing the possible outcomes.

b. Detennine the joint probability of each possible sequence of events.

c. What is the expected IRR?

d. What is the range of possible IRRs for this project?