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# fm12 13 - 12-10 a The resulting decision tree is t=0 t=1...

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12-10 a. The resulting decision tree is: NPV t = 0 t = 1 t = 2 t = 3 P NPV Product \$3,000,000 0.24 \$881,718 \$211,612 (\$1,000,000) P = 0.5 P = 0.80 1,500,000 0.24 (185,952) (44,628) (\$500,000) P = 0.5 P = 0.60 100,000 0.12 (376,709) (45,205) (\$10,000) P = 0.20 0 0.40 (10,000) (4,000 ) P = 0.40 1.00 Exp. NPV = \$117,779 The NPV of the top path is: 3 ) 12 . 1 ( 000 , 000 , 3 \$ - 2 ) 12 . 1 ( 000 , 000 , 1 \$ - 1 ) 12 . 1 ( 000 , 500 \$ - \$10,000 = \$881,718. Using a financial calculator, input the following: CF 0 = -10000, CF 1 = -500000, CF 2 = -1000000, = 3000000, and I = 12 to solve for NPV = \$881,718.29 \$881,718. CF 3 The other NPVs were determined in the same manner.
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