Push the Boundaries (PtB) Ltd is a company providing sporting equipment to an ever-increasing market for extreme sports.

The management board have recently recognised that the increasing demand for winter-based sports equipment provides an opportunity for investment. The board therefore commissioned some market researchers to carry out a review of the market’s potential over the next 10 years and, following the provision of this report, formed a project team to look at potential investment opportunities. Two feasible options, A and B, have been put forward by the project team.

For proposal A there is a requirement for immediate investment of £8 m. There is a 0.3 probability that the income in years 1-5 will be £2.0m and years 6-10 will be £1.5m, a 0.5 probability that the income in years 1-5 will be £3.0m and years 6-10 will be £1.8m and a 0.2 probability that the income in years 1-10 will be £1.5m.

The initial investment for proposal B cannot be finalised as yet and there is a 0.7 probability that the initial investment will £4.5m and a 0.3 probability that the initial investment will be £3.5m. Whatever the initial investment, there is a 0.4 probability that years 1-4 income will be £1m with years 5-10 income being £800,000, a 0.5 probability that years 1-4 income will be £1.8m and years 5-10 income will be £1.5m and a 0.1 probability that years 1-10 will bring in £600,000 per annum.

the company discounts at the cost of capital of 15%.

Required:

Using a decision tree, assess which of the options would maximise the profits of the organisation over a ten-year time span. Comment upon whether your answer would change if there was certainty on the initial investment of proposal B.