9. Decision tree with multiple decision points Green Moose Industries Co. is planning to add a new product line to make iGadgets. However, Green Moose Industries is considering the possibility of abandoning the project if the demand for the new product is low. In the following decision tree table, (1), (2) and (3) represent decision points, also known as decision nodes or stages. The dollar value to the right of each decision node represents the net cash flow at that point, and the cash flows shown under t = 3, 4, and 5 represent the cash inflows if the project is pushed on to completion. If Green Moose Industries Co. decides to launch the new line for Gadgets at Stage (1), then it will spend $20,000 on the marketing study. If the marketing study yields positive results, then the firm will spend $100,000 on the prototype. If the prototype works well, then the firm will spend several millions more at Stage (3) to build a production plant. Suppose that as an analyst at Green Moose Industries you have to analyze sequential decisions. By studying the following decision tree, you learn which of the following? Check all that apply. There is a 10% probability that investment in a production plant will yield bad results. There is a 50% probability of the pilot project yielding good results. There is a 85% probability of the pilot project yielding good results. If the project is canceled after Stage (1), Green Moose Industries's costs will be $10,269,000. Complete the decision tree table by calculating the net present values (NPVs) and joint probabilities, as well as products of joint probabilities and NPVs for each decision branch. Assume that the weighted average cost of capital (WACC) is 10% for all decision branches. Hint: Use either a spreadsheet program's functions or a financial calculator for this task. Round the NPVs to the nearest dollar and remember to enter the minus sign if a value is negative. Note: All cash amounts in the following table are in thousands of dollars. Step 0 Step 1 Step 2 Step 3 Step 5 Step 4 Inflow 1st Prob 2nd Prob 3rd Inflow Inflow NPV ($) NPV x Joint Prob ($) Joint Prob (%) Invest Invest Invest (2) 50% (3) $4,761 $8,237 $20,065 $10,269 85% -$100 (2) 40% (3) $1,900 $2,345 $7,800 $10,000 (2) 10% Stop (3) $0 $0 $0 (1) - $20 15% Stop $0 $0 $0 $0 Expected NPV = Based on your calculations, in case Green Moose Industries abandons the new project right after the marketing study, the loss is 9. Decision tree with multiple decision points Green Moose Industries Co. is planning to add a new product line to make iGadgets. However, Green Moose Industries is considering the possibility of abandoning the project if the demand for the new product is low. In the following decision tree table, (1), (2) and (3) represent decision points, also known as decision nodes or stages. The dollar value to the right of each decision node represents the net cash flow at that point, and the cash flows shown under t = 3, 4, and 5 represent the cash inflows if the project is pushed on to completion. If Green Moose Industries Co. decides to launch the new line for Gadgets at Stage (1), then it will spend $20,000 on the marketing study. If the marketing study yields positive results, then the firm will spend $100,000 on the prototype. If the prototype works well, then the firm will spend several millions more at Stage (3) to build a production plant. Suppose that as an analyst at Green Moose Industries you have to analyze sequential decisions. By studying the following decision tree, you learn which of the following? Check all that apply. There is a 10% probability that investment in a production plant will yield bad results. There is a 50% probability of the pilot project yielding good results. There is a 85% probability of the pilot project yielding good results. If the project is canceled after Stage (1), Green Moose Industries's costs will be $10,269,000. Complete the decision tree table by calculating the net present values (NPVs) and joint probabilities, as well as products of joint probabilities and NPVs for each decision branch. Assume that the weighted average cost of capital (WACC) is 10% for all decision branches. Hint: Use either a spreadsheet program's functions or a financial calculator for this task. Round the NPVs to the nearest dollar and remember to enter the minus sign if a value is negative. Note: All cash amounts in the following table are in thousands of dollars. Step 0 Step 1 Step 2 Step 3 Step 5 Step 4 Inflow 1st Prob 2nd Prob 3rd Inflow Inflow NPV ($) NPV x Joint Prob ($) Joint Prob (%) Invest Invest Invest (2) 50% (3) $4,761 $8,237 $20,065 $10,269 85% -$100 (2) 40% (3) $1,900 $2,345 $7,800 $10,000 (2) 10% Stop (3) $0 $0 $0 (1) - $20 15% Stop $0 $0 $0 $0 Expected NPV = Based on your calculations, in case Green Moose Industries abandons the new project right after the marketing study, the loss is
