if the interest rate is 7% per year, what decision would you make based on the d
ID: 1172364 • Letter: I
Question
if the interest rate is 7% per year, what decision would you make based on the decision tree diagram in the figure below? Click the icon to view the decision tree diagram. Click the icon to view the interest and annuity table for discrete compounding when the MARR is 7% per year Calculate the PW value for the New Product. PWNew Product(7%)-$L thousand (Round to one decimal place.) More Info More Info Discrete Compounding: i-7% 225.000 prefit per yeer for fe years, starting at EOY3 Uniform Series Single Payment Amount Present To Find F To Find P Compound Compound Amount Factor ?? Find F Given A FIA 1.0000 2.0700 3.2149 4.4399 5.7507 7.1533 8.6540 10.2598 11.9780 13.8164 Sinking Capital Fund Recovery $eco,000 a EOY 2 Present Worth Factor ?? Find P Given A Factor Worth Factor Factor ToFind A Given P AIP 1.0700 0.5531 0.3811 0.2952 0.2439 0.2098 0.1855 0.1675 0.1535 0.1424 Factor ToFind A Now Product Given FG Given P FIP 1.0700 1.1449 1.2250 Given F PIF 0.8346 0.8734 0.8163 0.7629 0.7130 0.6663 0.6227 0.5820 0.5439 0.5083 2T5 000 prefit per year for fve yuars, starting at EOY 3 1.0000 0.4831 0.3111 0.2252 0.1739 0.1398 0.1156 0.0975 0.0835 0.0724 0.9346 1.8080 3.3872 4.1002 4.7665 s0 profit yr. for 7 yoars 1.4026 1.5007 1.6058 Yoar 0 5.9713 1.8385 1.9672 PrintDone 7.0236 PrintDoneExplanation / Answer
Cash Flow at End of Year 2 ($900,000) Present value of cash flow at 7% discount rate $ (786,060) (900000/(1.07^2) or 900000*Present worth factor(0.8734) Payoff with Probability of 0.7 $225000 per year from End of year3 to End of Year7 N A B C=A*B End of Year Cash flow Present Worth factor Present Value of cash flow 3 $225,000 0.8163 $183,667.02 4 $225,000 0.7629 $171,651.42 5 $225,000 0.7130 $160,421.89 6 $225,000 0.6663 $149,927.00 7 $225,000 0.6227 $140,118.69 SUM $805,786 A Present Value of Payoff $ 805,786 B Probability of payoff 0.70 Pay off with Probability0.3 $275000 per year from End of year3 to End of Year7 N A B C=A*B End of Year Cash flow Present Worth factor Present Value of cash flow 3 $275,000 0.8163 $224,481.92 4 $275,000 0.7629 $209,796.18 5 $275,000 0.7130 $196,071.20 6 $275,000 0.6663 $183,244.11 7 $275,000 0.6227 $171,256.18 SUM $984,849.59 C Present Value of Payoff $ 984,850 D Probability of payoff 0.30 E Expected Present Value of Payoff=A*B+C*D $ 859,505 F Present Value of cost $ (786,060) G=E+F Expected Net Present Value of Introducing new product $ 73,445 Expected Net Present value of Do Nothing option $0 Decision : INTRODUCE NEW PRODUCT Expected Worth positive $ 73,445
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