Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Free Spirit Industries Inc. Co. is planning to add a new product line to make iGadgets. However, Free Spirit Industries Inc. is considering the possibility

image text in transcribed Free Spirit Industries Inc. Co. is planning to add a new product line to make iGadgets. 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 represents the net cash flow at that point, and the cash flows shown under t=3,4, and 5 represent the cash inflows if the project is pushed on to completion. If Free Spirit Industries Inc. Co. decides to launch the new line for iGadgets 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 5% probability that the marketing study will produce negative results. 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 10% probability of the pilot project yielding average results. Free Spirit Industries Inc. Co. is planning to add a new product line to make iGadgets. 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 represents the net cash flow at that point, and the cash flows shown under t=3,4, and 5 represent the cash inflows if the project is pushed on to completion. If Free Spirit Industries Inc. Co. decides to launch the new line for iGadgets 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 5% probability that the marketing study will produce negative results. 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 10% probability of the pilot project yielding average results

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

Inside Private Equity

Authors: James M. Kocis, James C. Bachman IV, Austin M. Long III, Craig J. Nickels

1st Edition

0470421894, 978-0470421895

More Books

Students also viewed these Finance questions

Question

What would the cash cycle be for this problem?

Answered: 1 week ago