Business, 11.03.2020 21:55 orangeicecream

Your company is planning to introduce a new online shopping service. To reduce risk, senior management propose developing the service in three stages: a) A market test for one year with a few customers at a cost of $1 million. The likelihood of success for this test is estimated to be 75%. b) A introductory period of one year, if the market test is successful. During this test the most widely ordered products will be available through the service to a wider audience. This phase of the project is estimated to cost $2.5 million with have a 50% chance of success. c) Full roll-out of the service at the end of the second year if the introductory period is successful. This phase is estimated to cost $15 million and is expected to start generating revenue only by the end of the third year. There are 3 possible outcomes from the full roll out: Outcome Probability Year 4 Revenue Year 5 Revenue Year 6 Revenue Year 7 Revenue Huge Success 25% $12M $15M $18M $21M Moderate Success 50% $7M $9M $11M $13M Failure 25% -$3M -$4M -$5M -$6M NOTE: Scroll right. There are 7 years of revenue data and some web browsers make the table partially hidden. i) Construct a decision tree and list all the outcomes and cumulative probabilities (it may be easier to construct the tree in a different program and copy and paste into Excel) ii) Assume all the values are present values. Should the company pursue this project based on the expected NPV

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