Boiler Room Inc. manufactures office furniture. The firm is interested in "ergonomic" products that are designed to be easier on the bodies of office workers who suffer from ailments such as back and neck pain due to sitting for long periods. Unfortunately, customer acceptance of ergonomic furniture tends to be unpredictable, so a wide range of market response is possible. Management has made the following two-year probabilistic estimate of the cash flows associated with the project arranged in decision tree format ($000). $7,000 0,3 $4.000 0.7. $5,000 ($6,000) 0.8 $3,000 0.4 -$2,000 0.252.400 Boiler Room is a relatively small company, and would be seriously damaged by any project that lost more than $1.5 million. The firm's cost of capital is 14%. 1. Develop a probability distribution for NPV based on the forecast. In other words, calculate the project's NPV along each path of the decision tree and the associated probability. Do not round intermediate calculations. Round PVF values in intermediate calculations to four decimal places. Round the answers to two decimal places. Enter your answer in thousands of dollars and not in whole dollars; leaving off the "$". For example, an answer of $1 thousand should be entered as 1 not 1,000. Use a minus sign to indicate a negative NPV. Enter probabilities as decimals, e.g., 0.20. NPV ($000) Probability Path 1 Path 2 $ Path 3 $ Path 4 $ 2 Calculate the project's expected NPV ($000). Do not round intermediate calculations. Round PVF values in intermediate calculations to four decimal places. Round the answer to two decimal places. Enter your answer in thousands of dollars and not in whole dollars, leaving off the "$". For example, an answer of $1 thousand should be entered as 1.00 not 1,000. $ 3. Analyze your results, and make a recommendation about the project's advisability considering both expected NPV and risk. Should most rational managers forego such a project? (Enter "Yes" or "No" or "Not Enough Information") Boiler Room Inc. manufactures office furniture. The firm is interested in "ergonomic" products that are designed to be easier on the bodies of office workers who suffer from ailments such as back and neck pain due to sitting for long periods. Unfortunately, customer acceptance of ergonomic furniture tends to be unpredictable, so a wide range of market response is possible. Management has made the following two-year probabilistic estimate of the cash flows associated with the project arranged in decision tree format ($000). $7,000 0,3 $4.000 0.7. $5,000 ($6,000) 0.8 $3,000 0.4 -$2,000 0.252.400 Boiler Room is a relatively small company, and would be seriously damaged by any project that lost more than $1.5 million. The firm's cost of capital is 14%. 1. Develop a probability distribution for NPV based on the forecast. In other words, calculate the project's NPV along each path of the decision tree and the associated probability. Do not round intermediate calculations. Round PVF values in intermediate calculations to four decimal places. Round the answers to two decimal places. Enter your answer in thousands of dollars and not in whole dollars; leaving off the "$". For example, an answer of $1 thousand should be entered as 1 not 1,000. Use a minus sign to indicate a negative NPV. Enter probabilities as decimals, e.g., 0.20. NPV ($000) Probability Path 1 Path 2 $ Path 3 $ Path 4 $ 2 Calculate the project's expected NPV ($000). Do not round intermediate calculations. Round PVF values in intermediate calculations to four decimal places. Round the answer to two decimal places. Enter your answer in thousands of dollars and not in whole dollars, leaving off the "$". For example, an answer of $1 thousand should be entered as 1.00 not 1,000. $ 3. Analyze your results, and make a recommendation about the project's advisability considering both expected NPV and risk. Should most rational managers forego such a project? (Enter "Yes" or "No" or "Not Enough Information")
