Question $3$

The scientists at Vegetron have come up with an electric mop, and the firm is ready to go ahead with pilot production and test marketing.

The preliminary phase will take one year and cost $$125,000.$ Management feels that there is only a $50\%$ chance that pilot production and market tests will be successful.

If they are, then Vegetron will build a $$1$ million plant that would generate an expected annual cash flow in perpetuity of $$250,000$ a year after taxes.

Assume that if tests fail and Vegetron continues to go ahead with the project, the $$1$ million investment would generate only $$75,000$ a year. Display Vegetron's problem as a decision tree.

Assumptions:

Investments made at the beginning of period.

Discount rate of $10\%$

$$1m$ plant will take one year to become operational.