Question
The Research and Development team at Numex Auto has come up with an Electric Scooter. The firm is ready for pilot production and test marketing.
The Research and Development team at Numex Auto has come up with an Electric Scooter. The firm is ready for pilot production and test marketing. This will cost Rs 200 million and take three months. Management believes that there is 80% chance that the pilot production and test marketing will be successful. In case of success, Numex can build a plant costing Rs 1500 million. The plant will generate an annual cash inflow of Rs 300 million for 20 years if demand is high or an annual cash inflow of Rs 200 million if the demand is low. High demand has the probability of 0.60 while low demand has a probability of 0.40. What is the optimal course of action using decision tree analysis? Assume a discount rate of 10%.
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