5. Premium Patty is considering setting up a shop in Champaign, IL. Their plan can be...

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5. Premium Patty is considering setting up a shop in Champaign, IL. Their plan can be divided into 3 stages. Stage 1: The project requires a test marketing expense of $200,000. This test market is expected to last 1 year and there is a 60% chance of success. Stage 2: If the test market is a success, the firm plans an introduction into one region of the country at a cost of $2 million (at the start of the second year) and there is a 75% chance of success. Stage 3: If the regional introduction succeeds, the firm plans to introduce the product countrywide at a cost of $6 million (at the start of the third year). If it does so, there are three equal possibilities: a. The product sells much better than expected and generates $4 million in after-tax cash flows for the next 5 years. b. The product sells as well as expected and generates $2 million in after-tax cash flows for the next 5 years. The product sells less well than expected and generates $1 million in after-tax cash flows for the next 5 years. a. b. C. Assume a cost of capital of 10%. Draw the decision tree for this project. Estimate the expected NPV of Premium Patty's plan. 5. Premium Patty is considering setting up a shop in Champaign, IL. Their plan can be divided into 3 stages. Stage 1: The project requires a test marketing expense of $200,000. This test market is expected to last 1 year and there is a 60% chance of success. Stage 2: If the test market is a success, the firm plans an introduction into one region of the country at a cost of $2 million (at the start of the second year) and there is a 75% chance of success. Stage 3: If the regional introduction succeeds, the firm plans to introduce the product countrywide at a cost of $6 million (at the start of the third year). If it does so, there are three equal possibilities: a. The product sells much better than expected and generates $4 million in after-tax cash flows for the next 5 years. b. The product sells as well as expected and generates $2 million in after-tax cash flows for the next 5 years. The product sells less well than expected and generates $1 million in after-tax cash flows for the next 5 years. a. b. C. Assume a cost of capital of 10%. Draw the decision tree for this project. Estimate the expected NPV of Premium Patty's plan.

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Decision Tree Test Marketing 200K Success 60 4M Failure 40 0 Countrywide Introduction 6M Much Better 13 4M As Expected 13 2M Less Well 13 1M EXPLANATI... View the full answer