Attempts Keep the Highest/3 9. Decision tree with multiple decision points Cold Duck Manufacturing Inc. Co. is planning to add a new product line to make iBooks. However, Cold Duck Manufacturing Inc. is considering the possibility of abandoning the project if the demand for the new product is low. In the following decision tree table, (1), (2) and (3) represent decision points, also known as decision nodes or stages. The dollar value to the right of each decision node represents the net cash flow at that point, and the cash flows shown under t = 3, 4, and 5 represent the cash inflows if the project is pushed on to completion. If Cold Duck Manufacturing Inc. Co. decides to launch the new line for iBooks at Stage (1), then it will spend $60,000 on the marketing study. If the marketing study yields positive results, then the firm will spend $200,000 on the prototype. If the prototype works well, then the firm will spend several millions more at Stage (3) to build a production plant. Suppose that as an analyst at Cold Duck Manufacturing Inc. you have to analyze sequential decisions. By studying the following decision tree, you learn which of the following? Check all that apply. If the project is canceled after Stage (1), Cold Duck Manufacturing Inc.'s costs will be $10,269,000. There is a 95% probability of the pilot project yielding good results. There is a 10% probability that investment in a production plant will yield bad results. There is a 55% probability of the pilot project yielding good results. Complete the decision tree table by calculating the net present values (NPVS) and joint probabilities, as well as products of joint probabilities and NPVS for each decision branch. Assume that the weighted average cost of capital (WACC) is 9% for all decision branches. Hint: Use either a spreadsheet program's functions or a financial calculator for this task. Round the NPVs to the nearest dollar and remember to enter the minus sign if a value is negative. Note: All cash amounts in the following table are in thousands of dollars. Note: All cash amounts in the following table are in thousands of dollars. Step Step 0 Step 3 4 Step 5 Step 1 Step 2 2nd Prob Invest Prob NPV Joint Prob (%) NPV x Jo ($) 1st Invest 3rd Invest Inflow ($) (2) 55% -$10,269 (3) $4,761 $8,237 13,666 52.25 7,140 $20,065 $7,800 95% -$200 (2) 35% -$10,000 (3) $1,900 $2,345 (1) -$60 (2) 10% Stop (3) $0 $0 $0 $0 - 5% Stop $0 $0 $0 Expected $ Based on your calculations, you recommend that Cold Duck Manufacturing Inc. Grade It Now Save & Continue Continue without saving Note: All cash amounts in the following table are in thousands of dollars. Step 0 Step 1 Step 2 NPV x Jo 2nd Invest 1st Invest Prob Prob 3rd Invest ($) (2) 55% (2) 35% 7,140 Step Step 3 4 Step 5 NPV Joint Prob Inflow ($) (%) (3) $4,761 $8,237 $20,065 13,666 52.25 (3) $1,9 discontinues all old products and switches to iBooks (3) $0 $0 rejects the new project -$10,269 -$10,000 95% -$200 (1) -$60 (2) 10% Stop 5% Stop $0 delays the new project accepts the new project Based on your calculations, you recommend that Cold Duck Manufacturing Inc. Grade It Now Save & Continue Continue without saving Attempts Keep the Highest/3 9. Decision tree with multiple decision points Cold Duck Manufacturing Inc. Co. is planning to add a new product line to make iBooks. However, Cold Duck Manufacturing Inc. is considering the possibility of abandoning the project if the demand for the new product is low. In the following decision tree table, (1), (2) and (3) represent decision points, also known as decision nodes or stages. The dollar value to the right of each decision node represents the net cash flow at that point, and the cash flows shown under t = 3, 4, and 5 represent the cash inflows if the project is pushed on to completion. If Cold Duck Manufacturing Inc. Co. decides to launch the new line for iBooks at Stage (1), then it will spend $60,000 on the marketing study. If the marketing study yields positive results, then the firm will spend $200,000 on the prototype. If the prototype works well, then the firm will spend several millions more at Stage (3) to build a production plant. Suppose that as an analyst at Cold Duck Manufacturing Inc. you have to analyze sequential decisions. By studying the following decision tree, you learn which of the following? Check all that apply. If the project is canceled after Stage (1), Cold Duck Manufacturing Inc.'s costs will be $10,269,000. There is a 95% probability of the pilot project yielding good results. There is a 10% probability that investment in a production plant will yield bad results. There is a 55% probability of the pilot project yielding good results. Complete the decision tree table by calculating the net present values (NPVS) and joint probabilities, as well as products of joint probabilities and NPVS for each decision branch. Assume that the weighted average cost of capital (WACC) is 9% for all decision branches. Hint: Use either a spreadsheet program's functions or a financial calculator for this task. Round the NPVs to the nearest dollar and remember to enter the minus sign if a value is negative. Note: All cash amounts in the following table are in thousands of dollars. Note: All cash amounts in the following table are in thousands of dollars. Step Step 0 Step 3 4 Step 5 Step 1 Step 2 2nd Prob Invest Prob NPV Joint Prob (%) NPV x Jo ($) 1st Invest 3rd Invest Inflow ($) (2) 55% -$10,269 (3) $4,761 $8,237 13,666 52.25 7,140 $20,065 $7,800 95% -$200 (2) 35% -$10,000 (3) $1,900 $2,345 (1) -$60 (2) 10% Stop (3) $0 $0 $0 $0 - 5% Stop $0 $0 $0 Expected $ Based on your calculations, you recommend that Cold Duck Manufacturing Inc. Grade It Now Save & Continue Continue without saving Note: All cash amounts in the following table are in thousands of dollars. Step 0 Step 1 Step 2 NPV x Jo 2nd Invest 1st Invest Prob Prob 3rd Invest ($) (2) 55% (2) 35% 7,140 Step Step 3 4 Step 5 NPV Joint Prob Inflow ($) (%) (3) $4,761 $8,237 $20,065 13,666 52.25 (3) $1,9 discontinues all old products and switches to iBooks (3) $0 $0 rejects the new project -$10,269 -$10,000 95% -$200 (1) -$60 (2) 10% Stop 5% Stop $0 delays the new project accepts the new project Based on your calculations, you recommend that Cold Duck Manufacturing Inc. Grade It Now Save & Continue Continue without saving