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 cansell 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)

c-) Expand Option

Apple now has ONLY Expand option and DOES NOT HAVE ABANDON or SWITCH OPTIONS.

If the demand is high and the production is high , with an immediate extra investment of 10 Billion $ they can expand the business. By the end of 36 months (3 years from the initial investment of 30 Billion) the demand will be high or low with 50% chance and production will be always high. If demand is high they will receive 100 Billion and if the demand is low they will receive 25Billion.

Draw decision tree with the expand option. What is the NPV with expand option? What is the value of expand option?