Draw a decision tree

In trying to decide whether to approve a development budget for an improved product, you are urged to do so on the grounds that the development, if successful, will give you a competitive edge. But if you do not develop the product, your competitor may—and may seriously—damage your market share.

Draw a decision tree.

a) In the BHEL case, if the project cash flows falls by 5 percent what would be the NPV and IRR? What would be the percentage change in NPV?

(b) If the initial investment is equally spread over 2 years, what would be the new NPV?

(c) If the discount rate remains constant for the first 5 years and then rises by 2 percentage points, calculate the new NPV and IRR

Solution:

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