0 Decision Tree Analysis. The Drysdale Corporation is contemplating the development of a new product. The initial investment required to purchase the necessary equipment is $200,000. There is a 60...

0 Decision Tree Analysis. The Drysdale Corporation is contemplating the development of a new product. The initial investment required to purchase the necessary equipment is $200,000. There is a 60 percent chance that demand will be high in year 1. If it is high, there is an 80 percent chance that it will continue high indefinitely. If demand is low in year 1, there is a 60 percent chance that it will continue to be low indefinitely. If demand is high, forecasted cash inflow (before taxes) is $90,000 a year; if demand is low, forecasted cash inflow is $30,000 a year.

                The corporate income tax rate is 40 percent. The company uses straight-line depreciation and will depreciate the equipment over 10 years with no salvage value.

                (a) Determine the after-tax cash inflows. (b) Set up a decision tree representing all possible outcomes, and compute the expected NPV using a 10 percent risk-free rate of return.