Question
You are trying to decide whether to make an investment of $498.7million in a new technology to produce Everlasting Gobstoppers. There is a 61% chance
You are trying to decide whether to make an investment of
$498.7million in a new technology to produce Everlasting Gobstoppers. There is a
61% chance that the market for these candies will produce profits of
$98.9 million annually, a(n)
22% chance the market will produce profits of$50.1
million, and a(n) 17% 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
11.47%per year. There is a(n) 21%chancethat the cost of capital will drop to8.86%in a year and stay at that level forever, and a(n)79% chance that it will stay at
11.47% 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 is15.59%and the profits last forever?
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