FINA 395 Chapter Notes - Chapter 9: Decision Tree Learning, Net Present Value, Scenario Analysis
28 Jun 2016
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A fundamental problem in npv analysis is dealing with uncertain future outcomes. There is usually a sequence of decisions in npv project analysis. Decision trees are used to identify the sequential decisions in npv project analysis. Decision trees allow us to graphically represent the alternatives available to us in each period and the likely consequences of our actions. This graphical representation helps to identify the best course of action. The stewart pharmaceuticals corporation is considering investing in developing a drug that cures the common cold. A corporate planning group, including representatives from production, marketing, and engineering, has recommended that the firm go ahead with the test and development phase. This preliminary phase will last one year and cost billion. Furthermore, the group believes that there is a 60% chance that tests will prove successful. If the initial tests are successful, stewart pharmaceuticals can go ahead with full-scale production. Production will occur over the next four years.
