Corporate Finance: The Core Plus MyLab Finance with Pearson eText -- Access Card Package (4th Edition)
4th Edition
ISBN: 9780134409276
Author: Jonathan Berk, Peter DeMarzo
Publisher: PEARSON
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Textbook Question
Chapter 22, Problem 1P
Your company is planning on opening an office in Japan. Profits depend on how fast the economy in Japan recovers from its current recession. There is a 50% chance of recovery this year. You are trying to decide whether to open the office now or in a year. Construct the decision tree that shows the choices you have to open the office either today or one year from now.
Expert Solution & Answer
Summary Introduction
To draw: The decision tree.
Introduction:
Decision tree is a tree-like graph which helps to identify strategies which are most likely to achieve goals. A decision tree comprises decision support tools.
Explanation of Solution
Given information:
A company is planning on opening an office in Japan. Company profit depends on Japanʼs economyʼs recovery from its current recession. The chance of recovery from recession is 50.00%.
Possible decision:
Possible decision in the decision tree:
- 1. To open office
- 2. To not open office
If to open office, then two possible decisions:
- 1. Economy recover
- 2. Economy doesn’t recover
If to not open office, then two possible decisions:
- 1. Economy recover
- 2. Economy doesn’t recover
If to not open office and economy recover, then two possible decisions:
- 1. To open office
- 2. To not open office
If to not open office and the economy does not recover, then two possible decisions:
- 1. To open office
- 2. To not open office
Diagram from decision tree:
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Chapter 22 Solutions
Corporate Finance: The Core Plus MyLab Finance with Pearson eText -- Access Card Package (4th Edition)
Ch. 22.1 - What is the difference between a real option and a...Ch. 22.1 - Why does a real option add value to an investment...Ch. 22.2 - Prob. 1CCCh. 22.2 - In what circumstances does the real option add...Ch. 22.2 - How do you use a decision tree to make the best...Ch. 22.3 - What is the economic trade-off between investing...Ch. 22.3 - Prob. 2CCCh. 22.3 - Does an option to invest have the same beta as the...Ch. 22.4 - Why can a firm with no ongoing projects, and...Ch. 22.4 - Why is it sometimes optimal to invest in stages?
Ch. 22.4 - How can an abandonment option add value to a...Ch. 22.5 - Prob. 1CCCh. 22.5 - Prob. 2CCCh. 22.6 - Why can staging investment decisions add value?Ch. 22.6 - How can you decide the order of investment in a...Ch. 22.7 - Prob. 1CCCh. 22.7 - Prob. 2CCCh. 22 - Your company is planning on opening an office in...Ch. 22 - You are trying to decide whether to make an...Ch. 22 - Prob. 4PCh. 22 - Prob. 5PCh. 22 - You are a financial analyst at Global Conglomerate...Ch. 22 - Prob. 7PCh. 22 - Prob. 8PCh. 22 - Consider again the electric car dealership in...Ch. 22 - Prob. 12PCh. 22 - Prob. 13PCh. 22 - You are an analyst working for Goldman Sachs, and...Ch. 22 - You own a small networking startup. You have just...Ch. 22 - An original silver dollar from the late eighteenth...Ch. 22 - What implicit assumption is made when managers use...Ch. 22 - Prob. 22PCh. 22 - Genenco is developing a new drug that will slow...Ch. 22 - Prob. 24PCh. 22 - Your firm is thinking of expanding. If you invest...Ch. 22 - Prob. 26PCh. 22 - Assume that the project in Example 22.5 pays an...
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