If the interest rate is 8% per year, what decision would you make based on the decision tree diagram in Figure below. IntroduceNew Product(0.6)-$1,000,000 atΕΟΥ 2$200,000 profit per yearfor six years, starting atΕΟΥ 3(0.4)$280,000 profit per yearfor six years, starting atΕΟΥ 3Year 0$0 profit/yr. for 8 yearsDo Nothing

Net Present Value is the difference between the present value of cash inflows and cash outflows. The…

Answered: If the interest rate is 8% per year,…

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If the interest rate is 8% per year, what decision would you make based on the decision tree diagram in Figure below.

EBK CFIN

6th Edition

ISBN:9781337671743

Author:BESLEY

Publisher:BESLEY

Chapter7: Stocks (equity) - Characterstics And Valuation

Section: Chapter Questions

Problem 20PROB

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Concept explainers

Present Value

Present value (PV) is defined as the current or present value of all future sums of cash flow or money at a specified rate of return. This rate of return is known as the discounted rate, which is essentially the interest rate, discounted over some time. The expected cash flows are discounted at a discount rate to compute the present value. The higher the discount rate, the higher the future value (FV), but the lower the present value.

Question

If the interest rate is 8% per year, what decision would you make based on the decision tree diagram in Figure below.

Introduce
New Product
(0.6)
-$1,000,000 at
ΕΟΥ 2
$200,000 profit per year
for six years, starting at
ΕΟΥ 3
(0.4)
$280,000 profit per year
for six years, starting at
ΕΟΥ 3
Year 0
$0 profit/yr. for 8 years
Do Nothing

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