A company has already spent $80,000 developing a new product, and is now considering whether or not to market the
product.
Tooling for production of the new product would cost $50,000.
If the product is produced and marketed, the company estimates that there is only one chance in four that the product would be successful. If successful, the net income would be $100,000 per year for 8 years.
If not successful, the company would lose $30,000 per year for 2 years, after which time the venture would be terminated. The minimum rate of return on the capital is 20% per year.
Draw a decision tree and determine the best alternative using the expected net present value criterion.
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