Question

XYZ Inc. wants to invest in a project where the initial
investment requires 5 Billion. The **annual** discount
rate is 5%

Here are the other details about the investment:

At the end of the year, the demand might be
** High** or

Also at the end of the year, XYZ will also know whether its
production facilities are producing enough or not. The
probabilities of having enough vs not enough production are
**equal.**

The payoffs are: High Demand – High Production: 25Billion $.

High Demand – Low Production: 10Billion $.

Low Demand – High Production: 5 Billion $.

Low Demand – Low Production: 0 Billion $.

**If** the demand is low and production is high
they can choose one of the following options:

** Option 1**

- They can produce CELL PHONE in the same facilities. This will cost them 10Billion immediately
- The payoff would be 40 Billion by the end of 24 months (2 years from the initial investment of 5 Billion)

**OR**

**Abandon Option**

- They can sell all the facilities to a Chinese company. The payoff would be immediate 25Billion dollars.

**Draw the decision tree.**

**What is the NPV of XYZ in this scenario? (Show your
calculations step by step and explain why you chose/or did not
choose a particular option)**

Answer #1

XYZ Inc. wants to invest in a project where the initial
investment requires 5 Billion. The annual discount
rate is 5%
Here are the other details about the investment:
At the end of the year, the demand might be
High or Low
with chances of 60% or 40%,
respectively.
Also at the end of the year, XYZ will also know whether its
production facilities are producing enough or not. The
probabilities of having enough vs not enough production are
equal....

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operating expenses (not including depreciation) are predicted to be
30% of sales. The equipment can be sold for $500,000 at the end of
year 4.Padico also needs to add...

PADICO is considering an investment project. The
project requires an initial $5 million outlay for equipment and
machinery. Sales are projected to be $2.5 million per year for the
next four years. The equipment will be fully depreciated
straight-line by the end of year 4. The cost of goods sold and
operating expenses (not including depreciation) are predicted to be
30% of sales. The equipment can be sold for $500,000 at the end of
year 4.Padico also needs to add...

PADICO is considering an investment project. The project
requires an initial $5 million outlay for equipment and machinery.
Sales are projected to be $2.5 million per year for the next four
years. The equipment will be fully depreciated straight-line by the
end of year 4. The cost of goods sold and operating expenses (not
including depreciation) are predicted to be 30% of sales. The
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First, there is a 50% chance that the
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Kansas Co. wants to invest in a project in
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one year. The spot rate of the yuan is $.12, and Kansas thinks this
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Will rate, thank you.
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surge has transformed Mexico into the eighth-largest automaker in
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