Determine the better alternative (either X or Y) based on a Decision Tree and Estimated Monetary Value (EMV) computations for each project. Use Present Worth (PW) as the parameter for EMV calculations. The events that can occur for each project, and their probabilities, are described below. ALTERNATIVE X: Purchase a Used Kona Ice Truck and Sell Snow Cones at Special Events In this project, you will buy a used truck, at a cost of $25,000. There is a 60% chance that the truck will need $5,000 worth of parts and labor (refurbish cost) before you can put it into service. Once in service, you estimate there is a 30% chance that your business will be very popular and generate $7, 500 of annual income, and a 70% chance that you will generate "OK" income of only $5, 500 per year. Lastly, you assume that the truck will have a salvage value of $6,000 if you had to refurbish the truck, and a salvage value of $4,000 if you did not need to refurbish it at time of purchase. This alternative is expected to last 5 years. For this alternative, use an interest rate of 5% annual for all PW calculations. ALTERNATIVE Y: Invest in a $25,000 face-value bond for a bond purchase price of only $22, 500 (buying at a discount), where the bond pays 5% annual interest, and will mature in 10 years. You will hold on to this bond for 5 years and then sell it. By the time you sell the bond after 5 years of ownership, you estimate there is a 65% chance that general bond interest rates will have fallen to 2%, and a 35% chance that bond rates will rise to 8% at EOY 5 -- thus affecting the selling price of your bond at EOY 5. Note that the bond pays 5% interest based on the face value of the bond, and this payment does not change. For PW calculations of this alternative, use 5% annual also. Perform a sensitivity analysis on the purchase price of the bond of Alternative Y. For this analysis, try at least 5 different bond costs moving from $22, 500 (either higher dollars or lower dollars, whichever draws this alternative closer to the PW of Alternative X). Based on your calculations, approximately what is the bond purchase price (if not $22, 500) that would make Project Y as good as Project X? Determine the better alternative (either X or Y) based on a Decision Tree and Estimated Monetary Value (EMV) computations for each project. Use Present Worth (PW) as the parameter for EMV calculations. The events that can occur for each project, and their probabilities, are described below. ALTERNATIVE X: Purchase a Used Kona Ice Truck and Sell Snow Cones at Special Events In this project, you will buy a used truck, at a cost of $25,000. There is a 60% chance that the truck will need $5,000 worth of parts and labor (refurbish cost) before you can put it into service. Once in service, you estimate there is a 30% chance that your business will be very popular and generate $7, 500 of annual income, and a 70% chance that you will generate "OK" income of only $5, 500 per year. Lastly, you assume that the truck will have a salvage value of $6,000 if you had to refurbish the truck, and a salvage value of $4,000 if you did not need to refurbish it at time of purchase. This alternative is expected to last 5 years. For this alternative, use an interest rate of 5% annual for all PW calculations. ALTERNATIVE Y: Invest in a $25,000 face-value bond for a bond purchase price of only $22, 500 (buying at a discount), where the bond pays 5% annual interest, and will mature in 10 years. You will hold on to this bond for 5 years and then sell it. By the time you sell the bond after 5 years of ownership, you estimate there is a 65% chance that general bond interest rates will have fallen to 2%, and a 35% chance that bond rates will rise to 8% at EOY 5 -- thus affecting the selling price of your bond at EOY 5. Note that the bond pays 5% interest based on the face value of the bond, and this payment does not change. For PW calculations of this alternative, use 5% annual also. Perform a sensitivity analysis on the purchase price of the bond of Alternative Y. For this analysis, try at least 5 different bond costs moving from $22, 500 (either higher dollars or lower dollars, whichever draws this alternative closer to the PW of Alternative X). Based on your calculations, approximately what is the bond purchase price (if not $22, 500) that would make Project Y as good as Project X
