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At Stage 2 of the decision tree it shows that if a project is successful, the payoff will be $53,000 with a 0.7 chance of
At Stage 2 of the decision tree it shows that if a project is successful, the payoff will be $53,000 with a 0.7 chance of occurrence. There is also the 0.3 chance of a $24,000 payoff. Stage 2 is a year from now. The cost of the project is $25,000 today (Stage 1). The cost of capital is 15 percent. What is the NPV of the project at Stage 1? (Hint: Solve for the expected value of the payoff a year from now, discount the value, and then compare with initial investment).
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-$1,600
$1,600
-$4,900
$4,900
-$12,391.30
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