Reference no: EM131193100
A friend of yours needs to decide whether or not to invest in a multiyear project. If your friend decides not to invest the project,he or she has nothing to lose or gain.If your friend decides to invest the project, the initial cost is $14,000. The annual revenue is estimated to be $5,000 per year for six years but could vary between $2,500 and $7,000. Your friend estimates that the cost of capital (interest rate) is 11%,but it could be as low as 9.5% and as high as 12%. The basis of the decision to invest will be whether or not the project has a positive net present value.
(1) Construct a decision tree to capture the above scenario using the estimated annual revenue and the interest rate. Note that your tree should include the following considerations if any.
We use the negative sign (-) for the cost, the expenses, cash outflow, etc.
We use the positive sign (+) for the revenue,profit, cash inflow, etc.
(2) Write down the number of decision strategies that you can identify from your decision tree.
(3)Write down the expected NPV for each decision strategy.
(4)Generate the two-way sensitivity analysis results, including Sensitivity Graph and Strategy Region ONLY,between these two strategies. Set the steps = 25.
(5)Write down what the annual revenue and the interest rateshould be such that the expected NPV is just greater than zero based on the results of Part 4. Submit your solution including the answers from (1) to (5).
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