Asked by Katherine Roman on May 17, 2024
Verified
Francis Corp is evaluating a capital budgeting project and has come up with the following two branch decision tree analysis ($000). The firm's cost of capital is 12%. What is the project's NPV?
Branch Decision Tree Analysis
A systematic, graphical approach to evaluating all possible alternatives in decision-making, representing outcomes, resources, costs, and utility.
Cost of Capital
A rephrasing: The minimum return that a company must earn on existing asset base to satisfy its creditors, owners, and other providers of capital.
NPV
Net Present Value; a calculation used to assess the value of a project or investment by determining the present value of future cash flows.
- Understand the application and consequences of decision tree analysis when assessing capital budgeting projects.
- Assess the adjusted net present value (NPV) of projects, employing proper discount rates, and analyze the outcomes of distinct projects.
Verified Answer
Upper Path: CFo=-7000, C01=5000, C02=5000; NPV: I=12
NPV = 1450
Lower Path: CFo=-7000, C01=3000, C02=3000; NPV: I=12
NPV = -1930
Project NPV = .6(1450) - .4(1930) = 870 - 772 = $98
Learning Objectives
- Understand the application and consequences of decision tree analysis when assessing capital budgeting projects.
- Assess the adjusted net present value (NPV) of projects, employing proper discount rates, and analyze the outcomes of distinct projects.
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