Question

1. You are considering the wholesale purchase of 10,000 computers for $6,000,000 with the idea of reselling them at retail. All cash inflows from sales are estimated as at the end of the year. In the first year each computer will sell for $1,000. In the second year each computer will sell for $500 since it will then be considered an older model. At the end of the second year you will have to pay another company $50 per computer for the proper disposal of any remaining computers. Each year, it is equally likely that there will be high sales or low sales. In a high sales year, you will sell 6,000 computers and in a low sales year you will only sell 3,000.
2. a）Draw a decision tree for this problem.
3. b）Should you purchase computers? Use an opportunity cost of capital of 10% and show all work.
4. c）A school is looking to purchase 7,000 computers at the end of one year. If you have 7,000 to sell, they will purchase them for $2,500,000. If you cannot sell 7000 then they do not want to buy any. 1 Produce a new decision tree that shows the option to sell to the school. 2. Does this option increase the value of this investment? What is the new value of the total investment.

Answer 1