Problem 2 (20pt): Your company is considering whether to develop a new phone. If you invest $1 million per year, then in 3 years you will have a prototype of the phone. You will then learn whether its performance is superior to the existing phones' performance. The probability that the performance will be superior is 40%. You can then decide whether to abandon the project (in which case no further cash flows occur) or to invest $10 million to manufacture the phone. If you go ahead and invest, you will then receive equal annual revenue from producing the phone for the next 4 years. If the technology is superior, the annual revenue would be $6 million. Otherwise, the annual revenue would be $3 million. The discount rate is 10%. 1. (10pt) Draw a decision tree of this problem and clearly point out at each decision node which decision should be made. 2. (5pt) Find the expected net present value if you decide to develop the phone. 3. (5pt) Determine whether to develop the phone or not. Problem 2 (20pt): Your company is considering whether to develop a new phone. If you invest $1 million per year, then in 3 years you will have a prototype of the phone. You will then learn whether its performance is superior to the existing phones' performance. The probability that the performance will be superior is 40%. You can then decide whether to abandon the project (in which case no further cash flows occur) or to invest $10 million to manufacture the phone. If you go ahead and invest, you will then receive equal annual revenue from producing the phone for the next 4 years. If the technology is superior, the annual revenue would be $6 million. Otherwise, the annual revenue would be $3 million. The discount rate is 10%. 1. (10pt) Draw a decision tree of this problem and clearly point out at each decision node which decision should be made. 2. (5pt) Find the expected net present value if you decide to develop the phone. 3. (5pt) Determine whether to develop the phone or not. Problem 2 (20pt): Your company is considering whether to develop a new phone. If you invest $1 million per year, then in 3 years you will have a prototype of the phone. You will then learn whether its performance is superior to the existing phones' performance. The probability that the performance will be superior is 40%. You can then decide whether to abandon the project (in which case no further cash flows occur) or to invest $10 million to manufacture the phone. If you go ahead and invest, you will then receive equal annual revenue from producing the phone for the next 4 years. If the technology is superior, the annual revenue would be $6 million. Otherwise, the annual revenue would be $3 million. The discount rate is 10%. 1. (10pt) Draw a decision tree of this problem and clearly point out at each decision node which decision should be made. 2. (5pt) Find the expected net present value if you decide to develop the phone. 3. (5pt) Determine whether to develop the phone or not. Problem 2 (20pt): Your company is considering whether to develop a new phone. If you invest $1 million per year, then in 3 years you will have a prototype of the phone. You will then learn whether its performance is superior to the existing phones' performance. The probability that the performance will be superior is 40%. You can then decide whether to abandon the project (in which case no further cash flows occur) or to invest $10 million to manufacture the phone. If you go ahead and invest, you will then receive equal annual revenue from producing the phone for the next 4 years. If the technology is superior, the annual revenue would be $6 million. Otherwise, the annual revenue would be $3 million. The discount rate is 10%. 1. (10pt) Draw a decision tree of this problem and clearly point out at each decision node which decision should be made. 2. (5pt) Find the expected net present value if you decide to develop the phone. 3. (5pt) Determine whether to develop the phone or not