Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

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

image text in transcribed

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 $18,000 at t = 0 for the design and model tank testing of the new boat. YYC's managers believe 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. 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; 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 11%. a. 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 cent. b. Find the project's standard deviation of NPV and coefficient of variation (CV) of NPV. Do not round intermediate calculations. Round the project's standard deviation to the nearest cent and CV to two decimal places. ONPV: $ CVNPV: 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? This project is of -Select- risk. 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 $18,000 at t = 0 for the design and model tank testing of the new boat. YYC's managers believe 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. 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; 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 11%. a. 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 cent. b. Find the project's standard deviation of NPV and coefficient of variation (CV) of NPV. Do not round intermediate calculations. Round the project's standard deviation to the nearest cent and CV to two decimal places. ONPV: $ CVNPV: 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? This project is of -Select- risk

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Quantum Economics And Finance

Authors: David Orrell

3rd Edition

1916081630, 978-1916081635

More Books

Students also viewed these Finance questions