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You are trying to decide whether to make an investment of $503.2 million in a new technology to produce Everlasting Gobstoppers. There is a 60%
You are trying to decide whether to make an investment of $503.2 million in a new technology to produce Everlasting Gobstoppers. There is a 60% chance that the market for these candies will produce profits of $101.2 million annually, a(n) 18% chance the market will produce profits of $49.8 million, and a(n) 22% chance that there will be no profits. The size of the market will become clear one year from now. Currently, the cost of capital of the project is 11.11% per year. There is a(n) 21%chance that the cost of capital will drop to 8.83% in a year and stay at that level forever, and a(n) 79% chance that it will stay at 11.11% forever. Movements in the cost of capital are unrelated to the size of the candy market. Construct the decision tree that shows the choices you have: to make the investment either today or one year from now. What decision should you make if the one-year cost of capital is 15.35% and the profits last forever? You should because the NPV of this choice is $ million. (Round to two decimal places.)
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