Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Hi, can you please solve this question with an explanation? thanks! Decision Tree. Zoom Technologies, Inc., is considering expanding its operations into digital music devices.

Hi, can you please solve this question with an explanation? thanks!image text in transcribed

Decision Tree. Zoom Technologies, Inc., is considering expanding its operations into digital music devices. Zoom anticipates an initial investment of $1.3 million and, at best, an operational life of 3 years for the project. Zoom's management team has considered several probable outcomes over the life of the project, which it has labelled as either "successes" or "failures." Accordingly, Zoom anticipates that in the first year of operations there is a 65% chance of success," with after-tax cash flow of $800,000, or a 35% chance of "failure," with a meagre $1,000 cash flow after tax. If the project "succeeds in the first year, Zoom expects three probable outcomes regarding net cash flows after tax in the second year. These outcomes are $2.2 million, $1.8 million, or $1.5 million, with probabilities of .3, .5, and .2, respectively. In the third and final year of operation, the net cash flows after tax are expected to be either $35,000 more or $55,000 less than they were in year 2, with an equal chance of occurrence. If, on the other hand, the project "fails" in year 1, there is a 60% chance that it will produce net cash flows after tax of only $1,500 in years 2 and 3. There is also a 40% chance that it will really fail and Zoom will earn nothing in year 2, and will get out of this line of business, terminating the project and resulting in no net cash flows after tax in year 3. The opportunity cost of capital for Zoom Technologies is 10%. (L04) a. Construct a decision tree representing the possible outcomes. b. Determine the joint probability of each possible sequence of Scanned events. CamSca What is the project's expected NPV

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

Commodity Trade And Finance

Authors: Michael Tamvakis

2nd Edition

041573245X, 978-0415732451

More Books

Students also viewed these Finance questions