Decision Tree

The Yoran Yacht Company (YYC), a prominent sailboat builder in Newport, may design a new 30-foot sailboat based on the "winged" keels first introduced on the 12-meter yachts that raced for the America's Cup.

First, YYC would have to invest $10,000 at t = 0 for the design and model tank testing of the new boat. YYC's managers believe that there is a 60% probability that this phase will be successful and the project will continue. If Stage 1 is not successful, the project will be abandoned with zero salvage value.

The next stage, if undertaken, would consist of making the molds and producing two prototype boats. This would cost $500,000 at t = 1. If the boats test well, YYC would go into production. If they do not, the molds and prototypes could be sold for $100,000 (occurs at t = 2). The managers estimate that the probability is 80% that the boats will pass testing, and that Stage 3 will be undertaken.

Stage 3 consists of converting an unused production line to produce the new design. This would cost $1 million at t = 2. If the economy is strong at this point, the net value of sales would be $3 million, while if the economy is weak, the net value would be $1.5 million. Both net values occur at t = 3, and each state of the economy has a probability of 0.5. YYC's corporate cost of capital is 12%.

Assume this project has average risk. Construct a decision tree and determine the project's expected NPV. Do not round intermediate calculations. Round your answer to the nearest dollar. $

Find the project's standard deviation of NPV and coefficient of variation (CV) of NPV. Do not round intermediate calculations. Round the answers to the nearest hundredth.

NPV (to the nearest dollar)	$
CVNPV (to 2 decimal places)	$

If YYC's average project had a CV of between 1.0 and 2.0, would this project be of high, low, or average stand-alone risk?