Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Spitfire Aviation Inc. manufactures small, private aircraft. Management is evaluating a proposal to introduce a new high-performance plane. High-performance aviation is an expensive sport undertaken

Spitfire Aviation Inc. manufactures small, private aircraft. Management is evaluating a proposal to introduce a new high-performance plane. High-performance aviation is an expensive sport undertaken largely by people who are both young and wealthy. Spitfire sees its target market as affluent professionals under 35 who have made a lot of money in the stock market in recent years.

Stock prices have been rising rapidly for some time, so investment profits have been very handsome, but lately there are serious concerns about a market downturn. If the market remains strong, Spitfire estimates it will sell 50 of the new planes a year for 5 years, each of which will result in a net cash flow contribution of $200,000. If the market turns down, however, only about 20 units a year will be sold. Economists think theres about a 40% chance that the market will turn down in the near future.

There are also some concerns about the design of the new plane. Not everyone is convinced it will perform as well as the engineering department thinks. Indeed, the engineers have sometimes been too optimistic about their projects in the past. If performance is below the engineering estimate, word-of-mouth communication among fliers will erode the products reputation, and unit sales after the first-year will be 50% of the preceding forecasts. Management thinks theres a 30% chance the plane wont perform as well as the engineers think it will. The cost to bring the plane through design into production is estimated at $15 million. Spitfires cost of capital is 12%.

Draw and fully label the decision tree for the project.

Calculate the NPV and probability along each path.

Calculate the projects expected NPV.

Calculate the projects standard deviation.

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_2

Step: 3

blur-text-image_3

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

Technical Analysis Of Stock Trends

Authors: Robert D. Edwards, John Magee

6th Edition

1599180219, 978-0139043437

More Books

Students also viewed these Finance questions

Question

Outline four general characteristics of Wundts thought.

Answered: 1 week ago

Question

=+What about SRI funds? Why, or why not?

Answered: 1 week ago