I am having a hard time understanding this question. Could you please help me with this? I am so confused. Thank you.
9. Decision tree with multiple decision points Cold Duck Manufacturing Inc. Co. is planning to add a new product line to make iToys. However, Cold Duck Manufacturing 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 Cold Duck Manufacturing Inc. Co. decides to launch the new line for iToys at Stage (1), then it will spend $20,000 on the marketing study. If the marketing study yields positive results, then the firm will spend $100,000 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 Cold Duck Manufacturing 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 50% probability of the pilot project yielding good results. There is a 85% probability of the pilot project yielding good results. If the project is canceled after Stage (1), Cold Duck Manufacturing Inc.'s costs will be $10,269,000. There is a 10% probability that investment in a production plant will yield bad results. Complete the decision tree table by calculating the net present values (NPVS) and joint probabilities, as well as products of joint probabilities and NPVS for each decision branch. Assume that the weighted average cost of capital (WACC) is 10% for all decision branches. Hint: Use either a spreadsheet program's functions or a financial calculator for this task. Round the NPVs to the nearest dollar and remember to enter the minus sign if a value is negative. Note: All cash amounts in the following table are in thousands of dollars. Step Step 0 Step 1 Step 2 Step 3 4 Step 5 2nd NPV Joint Prob (%) NPV x Jo ($) 1st Invest Prob Invest Prob 3rd Invest Inflow ($) (2) 50% -$10,269 (3) $4,761 $8,237 $20,065 13,064 42.50 5,552 85% -$100 (2) 40% -$10,000 (3) $1,900 $2,345 $7,800 -483 (1) -$20 (2) 10% Stop (3) $0 $0 $0 -91 15% Stop $0 $0 $0 $0 Expected $ NPV = Based on your calculations, in case Cold Duck Manufacturing Inc. abandons the new project right after the marketing study, the loss is 9. Decision tree with multiple decision points Cold Duck Manufacturing Inc. Co. is planning to add a new product line to make iToys. However, Cold Duck Manufacturing 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 Cold Duck Manufacturing Inc. Co. decides to launch the new line for iToys at Stage (1), then it will spend $20,000 on the marketing study. If the marketing study yields positive results, then the firm will spend $100,000 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 Cold Duck Manufacturing 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 50% probability of the pilot project yielding good results. There is a 85% probability of the pilot project yielding good results. If the project is canceled after Stage (1), Cold Duck Manufacturing Inc.'s costs will be $10,269,000. There is a 10% probability that investment in a production plant will yield bad results. Complete the decision tree table by calculating the net present values (NPVS) and joint probabilities, as well as products of joint probabilities and NPVS for each decision branch. Assume that the weighted average cost of capital (WACC) is 10% for all decision branches. Hint: Use either a spreadsheet program's functions or a financial calculator for this task. Round the NPVs to the nearest dollar and remember to enter the minus sign if a value is negative. Note: All cash amounts in the following table are in thousands of dollars. Step Step 0 Step 1 Step 2 Step 3 4 Step 5 2nd NPV Joint Prob (%) NPV x Jo ($) 1st Invest Prob Invest Prob 3rd Invest Inflow ($) (2) 50% -$10,269 (3) $4,761 $8,237 $20,065 13,064 42.50 5,552 85% -$100 (2) 40% -$10,000 (3) $1,900 $2,345 $7,800 -483 (1) -$20 (2) 10% Stop (3) $0 $0 $0 -91 15% Stop $0 $0 $0 $0 Expected $ NPV = Based on your calculations, in case Cold Duck Manufacturing Inc. abandons the new project right after the marketing study, the loss is
