Wardrobe Clothing Manufacturers is preparing a strategy for the fall season. One strategy is to go to a highly imaginative, new, four-gold-button sports coat. The all-wool product would be available for males and females. A second option would be to produce a traditional blue blazer line. The marketing research department has determined that the four-gold-button and traditional blue blazer lines offer the following probabilities of outcomes and related cash flows:

The initial cost to get into the new coat line is $100,000 in designs, equipment, and inventory. To enter the blue blazer line the initial cost in designs, inventory, and equipment is $60,000.

a. Diagram a complete decision tree of the possible outcomes similar to Figure 13-8. Take the analysis all the way through the process of computing expected NPV for each investment.

Figure 13-8

b. Given the analysis in part a, would you automatically make the investment indicated?

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Blue Blazer New Coat Present value of cash flows from sales Present value of cash flows from sales Expected sales Probability .4 Probability $240,000 $120,000 Fantastic.. Moderate Dismal ... .2 .6 .2 180,000 75,000 .4 .2 55,000 (3) Present Value of Cash Flow from Sales (S millions) (2) (4) (5) (6) Expected NPV (2) x (5) (S millions (1) Initial Cost (S millions) NPV Expected Sales (3) – (4) Probability (S millions) High .50 $100 $60 $40 15 $20.00 3.75 Moderate Expand semiconductor capacity .25 75 60 Low .25 40 60 (20) (5.00) Expected NPV = $18.75 Start в High .20 $200 $60 $140 $28.00 Enter home computer market Moderate .50 75 60 15 7.50 Low .30 25 60 (35) (10.50) Expected NPV = $25.00