1. Athens Development Corporation is considering a new product that will be sensitive to both economic conditions and competitor response. The product manager has decided to focus on three economic conditions: weak economy, normal economy, and strong economy. Competitors either will or will not respond with a competitive product, and competitor response is unlikely unless economic conditions turn out to be strong. Annual cash flows for each of these conditions appear below. The product has a six-year life and will require an initial cash outlay of $332,000. The cost of capital is 7 percent. Should Athens invest in this product? Explain.

Competitor Weak Normal Strong Response Economy Economy Economy Yes $36,500 $52,000 $73,000 No $48,500 71,000 94,000

Please complete the table of net present values below:

Competitor Weak Normal Strong Response Economy Economy Economy Yes $ ______ $______ $______ No $ ______ $______ $______

1. As a follow on to the prior problem, assume that the investment committee determined the probabilities below:

Probability the competitor will response 40%, will not respond 60%

Probability of each economic state over the six year horizonWeak