Analyze the project by developing decision tree for project

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Reference no: EM132885233

The Metrics electronic Company is considering a three-year project to market a device that measure the number of calories used up by athletes based on a new technology. A market study indicates a 60% probability that demand will be good and a 40% chance that it will be poor. It will cost $5M to bring the new device to market. Cash flow estimates indicate inflows of $3M per year for three years at full manufacturing capacity if demand is good, but just $1.5M per year if it's poor. The firm's cost of capital is 10%.

Problem 1: Analyze the project by developing a decision tree for the project then calculate the projects expected NPV.

Problem 2: Should the project be accepted or abandoned?

Problem 3: What are real options in capital budgeting? Give two examples of the type of options available in capital budgeting.

Problem 4: Why is the application of real options in capital budgeting is considered to be more effective than just only applying NPV to capital projects?

Reference no: EM132885233

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