Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

(50 points) The president of Chem-Tech is trying to decide whether to start a new product line or purchase a small company. It is not

image text in transcribed
(50 points) The president of Chem-Tech is trying to decide whether to start a new product line or purchase a small company. It is not financially possible to do both. To make the product for a 3- year period will require an initial investment of $250,000. The expected annual cash flows with probabilities in parentheses are: $75,000 (0.5), $90,000 (0.4, and $150,000 (0.1). To purchase the small company will cost $450,000 now. Market surveys indicate a 55% chance of increased sales for the company and 45% chance of severe decreases with an annual cash flow of +$25,000. If decreases are experienced in the first year, the company will be sold immediately (during year 1) at a price of $200,000. Increased sales would result in an annual cash flow of $100,000 for the first two years. If this occurs, a decision to expand after 2 years at an additional investment of $100,000 will be considered. This expansion could generate cash flows with indicated probabilities as follows: $120,000 (0.3), $140,000 (0.3), and $175,000 (0.4). If expansion is not chosen, the urrent size will be maintained with anticipated sales to continue. Assume there are no salvage values on investments. Use the description above and a 15%-per year return to do the following: a. Construct a decision tree with all values and probabilities shown. b. Determine the expected PW values at the "expansiono expansion" decision node after 2 c. Determine what decision should be made now to offer the greatest return possible for d. Explain in words what happen to expected values at each node if the planning horizon were years provided sales are up. ChemTech. extended beyond 3 years and all cash flow values continued as forecasted in the description

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Financial Management Principles And Applications

Authors: Sheridan Titman, Arthur Keown, John Martin

13th Global Edition

1292222182, 978-1292222189

More Books

Students also viewed these Finance questions

Question

Understand the use of different performance-rating techniques

Answered: 1 week ago