Problem 13-19 Decision tree analysis [LO13-4] Allison’s Dresswear Manufacturers is preparing a strategy for the fall season

Finance Dec 28, 2021

Problem 13-19 Decision tree analysis [LO13-4]

Allison’s Dresswear Manufacturers is preparing a strategy for the fall season. One alternative is to expand its traditional ensemble of wool sweaters. A second option would be to enter the cashmere sweater market with a new line of high-quality designer label products. The marketing department has determined that the wool and cashmere sweater lines offer the following probability of outcomes and related cash flows.

	Expand Wool Sweaters Line				Enter Cashmere Sweaters Line
Expected Sales	Probability		Present Value of Cash Flows from Sales		Probability		Present Value of Cash Flows from Sales
Fantastic		0.4	$	252,000		0.4	$	386,000
Moderate		0.3		156,000		0.2		255,000
Low		0.3		91,400		0.4		0

The initial cost to expand the wool sweater line is $137,000. To enter the cashmere sweater line, the initial cost in designs, inventory, and equipment is $143,000.

a. Calculate net present value if, Allison’s Dresswear Manufacturers decides to: (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to the nearest whole dollar.)