Free Spirit Industries Inc. Co. is planning to add a new product line to make iWidgets. However, Free Spirit Industries Inc. is considering the possibility of abandoning the project if the demand for the new product is low. In the following decision tree table, (1), (2) and (3) represent decision points also known as decision nodes or stages. The dollar value to the right of each decision node presents the net cash flow at that point and the cash flows shown under t = 3, 4, and 5 present the cash inflows if the project is pushed on to completion. If Free Spirit Industries Inc. Co. decides to launch the new line for iWidgets at Stage (1), then it will spend $60,000 on the marketing study. If the marketing study yields positive results, then the firm will spend $200,000 on the prototype. If the prototype works well, then the firm will spend several millions more at Stage (3) to build a production plant. Suppose that as an analyst at Free Spirit Industries Inc. you have to analyze sequential decisions. By studying the following decision tree, you learn which of the following? Check all that apply. There is a probability of 95% that the marketing study will produce positive results. There is a 5% probability that the marketing study will produce positive results. There is a 5% probability that the marketing study will produce negative results. There is a 10% probability of the pilot project yielding average results. Complete the decision tree table by calculating the net present values (NPVs) and joint probabilities, as well as products of joint probabilities and NPVs for each decision branch. Assume that the weighted average cost of capital (WACC) is 9% for all decision branches. Based on your calculations, in case Free Spirit Industries Inc. abandons the new project right after the marketing study, the loss is _____. Free Spirit Industries Inc. Co. is planning to add a new product line to make iWidgets. However, Free Spirit Industries Inc. is considering the possibility of abandoning the project if the demand for the new product is low. In the following decision tree table, (1), (2) and (3) represent decision points also known as decision nodes or stages. The dollar value to the right of each decision node presents the net cash flow at that point and the cash flows shown under t = 3, 4, and 5 present the cash inflows if the project is pushed on to completion. If Free Spirit Industries Inc. Co. decides to launch the new line for iWidgets at Stage (1), then it will spend $60,000 on the marketing study. If the marketing study yields positive results, then the firm will spend $200,000 on the prototype. If the prototype works well, then the firm will spend several millions more at Stage (3) to build a production plant. Suppose that as an analyst at Free Spirit Industries Inc. you have to analyze sequential decisions. By studying the following decision tree, you learn which of the following? Check all that apply. There is a probability of 95% that the marketing study will produce positive results. There is a 5% probability that the marketing study will produce positive results. There is a 5% probability that the marketing study will produce negative results. There is a 10% probability of the pilot project yielding average results. Complete the decision tree table by calculating the net present values (NPVs) and joint probabilities, as well as products of joint probabilities and NPVs for each decision branch. Assume that the weighted average cost of capital (WACC) is 9% for all decision branches. Based on your calculations, in case Free Spirit Industries Inc. abandons the new project right after the marketing study, the loss is _____
