eBook Problem Walk-Through 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 $14,000 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 10% a. Assume this project has average risk. Construct a decision tree and determine the project's expected NPV. Do not round intermediate calculations. Enter your answer in dollars. For example, an answer of $2 million should be entered as 2,000,000. Round your answer to the nearest cent. $ 958,952.66 b. Find the project's standard deviation of NPV and coefficient of variation (CV) of NPV. Do not round intermediate calculations. Enter your answer for standard deviation in dollars. For example, an answer of $2 million should be entered as 2,000,000. Round the project's standard deviation to the nearest cent and CV to two decimal places. OnPy: $ CVNPJ: 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. Inflation Adjustments The Rodriguez Company is considering an average-risk investment in a mineral water spring project that has an initial after-tax cost of $145,000. The project will produce 700 cases of mineral water per year indefinitely, starting at Year 1. The Year-1 sales price will be $147 per case, and the Year-1 cost per case will be $113. The firm is taxed at a rate of 25%. Both prices and costs are expected to rise after Year 1 at a rate of 5% per year due to inflation. The firm uses only equity, and it has a cost of capital of 13%. Assume that cash flows consist only of after-tax profits because the spring has an indefinite life and will not be depreciated. a. What is the present value of future cash flows? (Hint: The project is a growing perpetuity, so you must use the constant growth formula to find its NPV.) What is the NPV? Do not round intermediate calculations. Round your answers to the nearest dollar. Negative values, if any, should be indicated by a minus sign. PV of future CFs: $ 17,850 NPV: $ b. Suppose that the company had forgotten to include future inflation. What would they have incorrectly calculated as the project's NPV? Do not round intermediate calculations. Round your answer to the nearest dollar. Negative value, if any, should be indicated by a minus sign. S
