Work Station Inc. manufactures office furniture. The firm is interested in ergonomic products that are designed to be easier on the bodies of office workers

Work Station Inc. manufactures office furniture. The firm is interested in “ergonomic” products that are designed to be easier on the bodies of office workers who suffer from ailments such as back and neck pain due to sitting for long periods. Unfortunately customer acceptance of ergonomic furniture tends to be unpredictable, so a wide range of market response is possible. Management has made the following two-year probabilistic estimate of the cash flows associated with the project arranged in decision tree format ($000).

Work Station is a relatively small company, and would be seriously damaged by any project that lost more than $1.5 million. The firm’s cost of capital is 14%.
a. Develop a probability distribution for NPV based on the forecast. In other words, calculate the project’s NPV along each path of the decision tree and the associated probability.
b. Calculate the projects expected NPV.
c. Analyze your results, and make a recommendation about the project’s advisability considering both expected NPV andrisk.

$7,000 $5,000 $3,000 $2,400 .3 $4,000 < .7 .6 $16,000) .8 $2,000 .2