If the interest rate is 5% per year, what decision would you make based on the d
ID: 1203993 • Letter: I
Question
If the interest rate is 5% per year, what decision would you make based on the decision tree diagram in the Figure (show work)
E(PWnew) = $61,038, select new
E(PWnew) = -$161,038, do nothing
E(PWnew) = $161,038, select new
E(PWnew) = -$61,038, do nothing
E(PWnew) = $61,038, select new
E(PWnew) = -$161,038, do nothing
E(PWnew) = $161,038, select new
E(PWnew) = -$61,038, do nothing
$200.000 profit per year for six years, starting at EOY 3 (0.6) 280.000 profit per year for six years, starting at EOY 3 Year 0 S0 profit/lyr. for 8 years SO profit/yr. for 8 yearsExplanation / Answer
NEW PRODUCT A.
PROFIT
YEAR 1
YR2
YR3
YR4
YR5
YR6
Pdt A
200000
200000
200000
200000
DISCOUNTED@5%
.952
.9070
.863
.822
.783
.746
172600
164400
156600
149200
INVESTMENT AT EOY2 (-)
100000
100000
100000
100000
100000
discounted
90700
86000
82200
78300
74600
Net profits
-4100
13333
78300
75600
Pdt B ( PROFITS)
280000
280000
280000
280000
DISCOUNTED AT5%
.952
.9070
.863
.822
.783
.746
241640
230160
219240
208880
Invest eoy2(-)
100000
100000
100000
100000
100000
90700
86000
82200
783000
74600
Net profits
65640
60
Discison :
It is obvious that Project B is more profitable at 5% interest rate as the net cash flow is greater.
PROFIT
YEAR 1
YR2
YR3
YR4
YR5
YR6
Pdt A
200000
200000
200000
200000
DISCOUNTED@5%
.952
.9070
.863
.822
.783
.746
172600
164400
156600
149200
INVESTMENT AT EOY2 (-)
100000
100000
100000
100000
100000
discounted
90700
86000
82200
78300
74600
Net profits
-4100
13333
78300
75600
Pdt B ( PROFITS)
280000
280000
280000
280000
DISCOUNTED AT5%
.952
.9070
.863
.822
.783
.746
241640
230160
219240
208880
Invest eoy2(-)
100000
100000
100000
100000
100000
90700
86000
82200
783000
74600
Net profits
65640
60