Question
In: Finance
The White Flour company is considering expanding its operations into computer-based basketball games. The managers feel...
The White Flour company is considering expanding its operations into computer-based basketball games. The managers feel that there is a 3-year life associated with the project, and it will initially involve an investment of $100,000. It also believes that there is a 60% chance of success and a cash flow of $100,000 in year 1 and a 40% chance of failure and a $10,000 cash flow in year 1. If the project fails in year 1, there is a 60% chance that it will produce cash flows of only $10,000 in years 2 and 3. There is also a 40% chance that it will really fail and Sega will earn nothing in year 2 and get out of this line of business, with the project terminating and no cash flow occurring in year 3. If conversely, this project succeeds in the first year, then cash flows in the second year are expected to be $200,000, $175,000, or $150,000 with probabilities of 30%, 50%, and 20%, respectively. Finally, the cash flows in the third and final year of operation are expected to be either $30,000 more or $20,000 less than they were in year 2, with an equal chance of occurrence.
a. Construct a probability tree representing the possible outcomes.
b. Determine the joint probability of each possible sequence of events.
Solutions
Expert Solution
a. Probability tree with possible outcome:
b. Joint Probability of each possible event:
Year 1, joint probability of success and failure= Success probability * Failure probability = 60% * 40% = 24%
If success in year 1, Joint probability in of outcome $200,000, $175,000 and $150,000 in year 2 = 30% * 50% * 20%= 3%
If failure in year 1, joint probability of $10,000 and $0 outcome in year 2 and year 3 each = 60% * 40% = 24%
jeff jeffy answered 1 year agoRelated Solutions
14. White Diamond Flour Company manufactures flour by a series of three processes, beginning with wheat...
14. White Diamond Flour Company manufactures flour by a series
of three processes, beginning with wheat grain being introduced in
the Milling Department. From the Milling Department, the materials
pass through the Sifting and Packaging departments, emerging as
packaged refined flour.
The balance in the account Work in Process-Sifting Department
was as follows on July 1:
Work in Process-Sifting Department (850 units, 3/5
completed):
Direct materials (850 × $2.15)
$1,828
Conversion (850 × 3/5 × $0.50)
255
$2,083
The following...
White Diamond Flour Company manufactures flour by a series of three processes, beginning with wheat grain...
White Diamond Flour Company manufactures flour by a series of
three processes, beginning with wheat grain being introduced in the
Milling Department. From the Milling Department, the materials pass
through the Sifting and Packaging departments, emerging as packaged
refined flour.
The balance in the account Work in Process-Sifting Department
was as follows on July 1:
Work in Process-Sifting Department
(700 units, 3/5 completed):
Direct materials (700 × $2.35)
$1,645
Conversion (700 × 3/5 × $0.30)
126
$1,771
The following costs...
White Diamond Flour Company manufactures flour by a series of three processes, beginning with wheat grain...
White Diamond Flour Company manufactures flour by a series of
three processes, beginning with wheat grain being introduced in the
Milling Department. From the Milling Department, the materials pass
through the Sifting and Packaging departments, emerging as packaged
refined flour. The balance in the account Work in Process-Sifting
Department was as follows on July 1: Work in Process-Sifting
Department (700 units, 3/5 completed): Direct materials (700 ×
$2.05) $1,435 Conversion (700 × 3/5 × $0.50) 210 $1,645 The
following costs...
White Diamond Flour Company manufactures flour by a series of three processes, beginning with wheat grain...
White Diamond Flour Company manufactures flour by a series of
three processes, beginning with wheat grain being introduced in the
Milling Department. From the Milling Department, the materials pass
through the Sifting and Packaging departments, emerging as packaged
refined flour.
The balance in the account Work in Process-Sifting Department
was as follows on July 1:
Work in Process-Sifting Department
(800 units, 3/5 completed):
Direct materials (800 × $2.15)
$1,720
Conversion (800 × 3/5 × $0.50)
240
$1,960
The following costs...
White Diamond Flour Company manufactures flour by a series of three processes, beginning with wheat grain...
White Diamond Flour Company manufactures flour by a series of
three processes, beginning with wheat grain being introduced in the
Milling Department. From the Milling Department, the materials pass
through the Sifting and Packaging departments, emerging as packaged
refined flour.
The balance in the account Work in Process-Sifting Department
was as follows on July 1:
Work in Process-Sifting Department
(700 units, 3/5 completed):
Direct materials (700 × $2.05)
$1,435
Conversion (700 × 3/5 × $0.50)
210
$1,645
The following costs...
White Diamond Flour Company manufactures flour by a series of three processes, beginning with wheat grain...
White Diamond Flour Company manufactures flour by a series of
three processes, beginning with wheat grain being introduced in the
Milling Department. From the Milling Department, the materials pass
through the Sifting and Packaging departments, emerging as packaged
refined flour.
The balance in the account Work in Process-Sifting Department
was as follows on July 1:
Work in Process-Sifting Department
(900 units, 3/5 completed):
Direct materials (900 × $2.05)
$1,845
Conversion (900 × 3/5 × $0.40)
216
$2,061
The following costs...
White Diamond Flour Company manufactures flour by a series of three processes, beginning with wheat grain...
White Diamond Flour Company manufactures flour by a series of
three processes, beginning with wheat grain being introduced in the
Milling Department. From the Milling Department, the materials pass
through the Sifting and Packaging departments, emerging as packaged
refined flour. The balance in the account Work in Process-Sifting
Department was as follows on July 1: Work in Process-Sifting
Department (1,000 units, 3/5 completed): Direct materials (1,000 ×
$2.25) $2,250 Conversion (1,000 × 3/5 × $0.40) 240 $2,490 The
following costs...
White Diamond Flour Company manufactures flour by a series of three processes, beginning with wheat grain...
White Diamond Flour Company manufactures flour by a series of
three processes, beginning with wheat grain being introduced in the
Milling Department. From the Milling Department, the materials pass
through the Sifting and Packaging departments, emerging as packaged
refined flour.
The balance in the account Work in Process-Sifting Department
was as follows on July 1:
Work in Process-Sifting Department
(1,000 units, 3/5 completed):
Direct materials (1,000 × $2.15)
$2,150
Conversion (1,000 × 3/5 × $0.40)
240
$2,390
The following costs...
White Diamond Flour Company manufactures flour by a series of three processes, beginning with wheat grain...
White Diamond Flour Company manufactures flour by a series of
three processes, beginning with wheat grain being introduced in the
Milling Department. From the Milling Department, the materials pass
through the Sifting and Packaging departments, emerging as packaged
refined flour.
The balance in the account Work in Process-Sifting Department
was as follows on July 1, 2016:
Work in Process-Sifting Department
(700 units, 3535 completed):
Direct materials (700 × $2.35)
$1,645
Conversion (700 × 3535 × $0.30)
126
$1,771
The following...
White Diamond Flour Company manufactures flour by a series of three processes, beginning with wheat grain...
White Diamond Flour Company manufactures flour by a series of
three processes, beginning with wheat grain being introduced in the
Milling Department. From the Milling Department, the materials pass
through the Sifting and Packaging departments, emerging as packaged
refined flour.
The balance in the account Work in Process-Sifting Department
was as follows on July 1:
Work in Process-Sifting Department (600 units, 3/5
completed):
Direct materials (600 × $2.25)
$1,350
Conversion (600 × 3/5 × $0.30)
108
$1,458
The following costs...
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