Figure 145

Illustrative Decision Tree

The expected net present value of each investment alternative (column 5) is determined by linking possible outcomes (column 2), probabilities (column 3), and monetary values (column 4).

Action (1)

Demand conditions (2)

High

Action (1)

Demand conditions (2)

High

Expected value of cash flows Cost

Expected net present value $ 730,000

Present value Probability of cash flows (3) (4)

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