The management of InnoCam Ltd is evaluating whether to invest $250,000 in the development of a new high

resolution digital webcam. The development will take two years to complete. However, management believes

that there is only a 30 percent chance that a commercially viable new web camera will be produced. If

successful, the project will earn the company a net cash inflow of $600,000 per annum over the following 5

years if the demand is high and $200,000 if the demand is low. The probability of a high demand for the

webcam is 40 percent and the probability of a low demand is 60 percent. If the development fails, the company

will be able to salvage $50,000 by selling the development equipment at the end of year 2. As part of the

periodic training program for staff, the company has paid $20,000 to invite a team of German engineers to

come to their office and provide training to their staff. Moreover, the management team believes that, to invest

in this project, the company will have to borrow $100,000 at an interest rate of 6.5 percent per annum. The

required rate of return on this project is 15 percent per annum.

i. Draw a detailed decision tree for the above scenarios showing all decisions, probabilities, cash inflows

and outflows for each branch, and timing of the cash flows.

ii. Should the project proceed? Explain and justify your answer with detailed calculations.