Use decision tree analysis to evaluate the following scenario. Company Chet is considering a new product that requires a new factory costing $400m. Alternatively, Company Chet can simply invest the amount by taking-over an existing competitors manufacturing business. Furthermore, after one year, the company has the option of expanding production of the new product and building a second factory. It seems sales levels over year 1 could be either level A or level B, with a 90% chance of level A. The second factory would be considered if sales level A is experienced during year 1. This second factory would cost $500m at end year 1. Sales levels would then be at level C (otherwise they stay at level A).

Sales level A: provides net cash perpetuity $80m p.a.

Sales level B: provides net cash perpetuity -$20m p.a.

Sales level C: provides net perpetuity $125m p.a.

If takeover other business: net perpetuity $60m p.a.

The required rate of return k = 15% p.a.

Summarise this information into a decision tree and evaluate the options for Company Chet using NPV