Apple Inc. has 90 Billion dollars in cash and asked you to evaluate the following project for them. They want to invest in an I-TV project where the initial investment requires 30 Billion. The annual discount rate is 10%. Here are the other details about the investment: At the end of 9 months, the demand might be High or Low with chances of 60% or 40%, respectively. Also at the end of 9 months, Apple will also know whether its production facilities are producing enough or not. The probabilities of having enough vs not enough production are equal. The payoffs are: High Demand High Production: 45Billion $. High Demand Low Production: 20Billion $. Low Demand High Production: 5Billion $. Low Demand Low Production: 10Billion $. a-) Draw decision tree. What is the NPV? Should Apple invest?

b-) Switch and Abandon Options If the demand is low and production is high Apple can choose one of the following options: Switch Option They can produce I-PHONE7 in the same facilities. This will cost them 10Billion immediately The payoff would be 40 Billion by the end of 24 months (2 years from the initial investment of 30 Billion) OR Abandon Option They can sell all the facilities to a Chinese company (they will still get the 5 billion before selling the company). The payoff would be immediate 25Billion dollars.

Draw the decision tree. What is the NPV of Apple in this scenario? (Show your calculations step by step and explain why you chose/or did not choose a particular option)