Can u explain me how to draw a decision tree?

I attached my homework and probably the excel of answer below.

Can u help me to explain these?

3 3 After tax CF's Capital Spending DCF NPV(3) X S(3) -200 -200 -50 -200 150 4 9 5 12 167 8 6 20 0.12 r 0.1 142 S(0) 107 S(1) Alternate Method Inputs tion Type: 1=call, 0=put S Up movement/period Down movement/period Riskfree rate/period X 1 107 40% -40% 5% 200 Outputs Risk Neutral Prob 56.25% Now period Stock 0 107.10 Option Price 1 149.94 64.26 2 209.92 89.96 38.56 3 293.88 125.95 53.98 23.13 21.83 15.00 0.00 54.46 10.00 10.00 9.83 NPV using one manipulated binomial tree 3 Options 93.88 10.00 10.00 10.00 2 period Binomial Option Pricing: Multi Period Inputs tion Type: 1=call, 0=put S Up movement/period Down movement/period Riskfree rate/period X 0 149.94 40% -40% 5% 10 Outputs Risk Neutral Prob Now period Stock 0 149.94 1 209.92 0.00 2 293.88 0.00 0.00 Call 6.20 4.17 9.52 0.00 10.00 10.00 5 6 -100 -100 -0.98 -145.45 144.48 89.71 -50 -45 10 11 -50 -50 -5.30 -231.82 226.52 87.33 -200 -182 Call 0.00 18.34 0.00 Island Project in 10 years Time After tax cash inflows Capital spending DCF NPV(10) X S(10) S(0) BS call of 5 year project BS call of 10 year project 93.88 10.00 10.00 10.00 9.83 Option Price 54.46 10.00 10.00 0.00 other investments change by hand 33.34 9.52 119.9519 Island Project in 5 years Time After tax cash inflows Capital spending DCF NPV(5) X S(5) S(0) 56.25% t 7.28 7.03 7 3 8 9 9 18 2 7 135 12 7 -2 4 13 18 -2 12 14 30 -2 210 sigma 5 10 rf 0.2 0.2 0.04 0.04 Island Reclamation: Case 3 Finance-Moeller The credit crisis has caused a panic in the development market and Island Reclamation may have to turn down what Will Miller, Island's founder and CEO, believes is a good project. Will has been working with the county for years to allow his company to reclaim former industrially used islands in the Allegheny River. Once the clean up of an island is done, Island Reclamation then develops office, retail and residential properties on the island. Panther Island, may be the first in a series of developments but because of the upcoming local elections, Will believes he needs to begin the development soon. However, his investors are wary of committing the necessary funds at this time in the tentative real estate market. Will understands the investors concerns about this investment and believes he has come up with a creative solution. However, Will needs to value this unique solution and explain to his investors the benefits of this project. Island Reclamation has the expertise to clean up the island and since the seller must clean it prior to sale, the seller of the island is willing to enter a joint venture which will end in one year with Island Reclamation's option to buy the land for $15 million. Will Miller believes Island Reclamation can easily perform this task without sacrificing any other cash flows. The seller has agreed to pay all of the incremental clean up costs but they want Island Reclamation to pay an up front fee to enter into the joint venture. After preliminary talks with the seller, Will believes the fee will be no more than $3 million. If Island Reclamation buys the land in a year, they will continue to maintain the island and that cost will be offset by a two year lease they have agreed to give to the county. In two years the county government has agreed to buy the land for $10 million if Island Reclamation does not want to further develop the island. The county government is also open to an early termination of their lease at the end of a year and potentially buying the island. If Island Reclamation maintains possession of the land, it will be ready for speeding development and this phase will only take a year and cost $200 million. After that year, Will believes the property will take three years to become fully occupied and after cash flows will level off (year 7 flows will go on forever). The cash flows for the occupied property are shown in the table below. Year 3 After tax cash inflows Capital spending -200 4 9 5 12 6 20 7 20 Island Reclamation estimates their standard deviation of cash flows as 40%, their opportunity cost as 12% and the risk free rate as 5%. For the binomial option valuation, assume the distribution of cash flows is normal. 1 Will believes that the following information needs to be displayed and explained to his investors. 1. A decision tree 2. Fully describe each option. 3. Using binomial option pricing methodology and assuming Island Reclamation pays $3 million to enter the joint venture, what is the value of this project? 4. Assume Island Reclamation could do this project immediately (with the cash flows in the above table starting at time 0), what is the NPV? Compare the difference between the value in part (3) and part (4). What factors are driving the valuation difference? 5. What should Will recommend to his investors? 6. Using the Black Scholes Model, value the possibility that Island Reclamation will be able to develop two more islands, one in five years and one in ten years. The cash flows of these two projects are shown below. Will believes that the riskiness of the cash flows will reduce over this period so assume the standard deviation is 20%, the opportunity cost is 10% and the risk free rate is 5%. Assume the last year flows of each project goes on forever and these flows are lognormal. Island Project in 5 years Time After tax cash inflows Capital spending 5 6 -100 7 3 8 9 9(forever ) 18 -50 Island Project in 10 years Time After tax cash inflows Capital spending 10 11 -50 -200 12 7 -2 13 18 -2 14(forever ) 30 -2 Instructions Though this case is still based on the numerical calculations, this case is also asking for you to make recommendations. So make sure you answer the questions posed and explain your calculations like you were talking to the investors. In other words, in contrast to the other cases, I also expect you to write the case study \"in character\". Create a presentation that the investors could look at. Make sure you include a copy of the calculations in the attachments to the case so we can easily see the 5 inputs (S, X, Rf, T, and sigma). A one page print out of the option pricing we created during the in class option exercises is a good way to display the valuation. (DO NOT print those formula sheets from Excel, they are impossible to read and not informative.) 2 Please hand in one hard copy at the beginning of the first class of your group. Make sure and bring a copy of the work with your to class so we can work the problem together. 3