Decision Tree Assignment

Mondi Plastics Company is one of the small companies that have got into a contract agreement with Ford Motor Co. to produce spoilers for their new 2013 Ford Fusion. They have an option of using their current plant which is almost at peak capacity. This option will require an initial cost $400,000 for the mold and will generate annual cash flows of $300,000. If they exercise this option, they cannot take additional work from Ford or any other company.

They also have the alternative of opening a new plant which will cost them $800,000. With the new plant there is a 25% chance that they will generate cash flow of $300,000/yr. If this happens, they will sell the plant at $600,000 after year 1.

With the new plant, there is also a 75% chance of increased production with a cash flow of $450,000 in that first year. If this is the case, they will either:

• Expand New Plant which will require $250,000 investment. This is projected to generate annual cash flows with respective probabilities as follows: $750,000 (0.2), $450,000 (0.5), and $550,000 (0.3). OR

• No expansion: in which case the current production and CF of $450,000/yr will be maintained for the remaining years. Given a MARR of 12% and a 3 year study period, use excel and:

a) Construct a decision tree and include all the values and probabilities.

b) Determine the expected PW values for the “Expand New Plant/No Expansion” decision node which occurs after year 1.

c) Determine the expected PW values for the “Current Plant/New Plant” decision node and give your recommendation on what option the management of Moindi should take. Get Finance homework help today

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