INSTRUCTION: JLY Limited wants absorb some short-term excess production capacity at its plant, the company is considering a short manufacturing run for either of two new products, a temperature sensor or a pressure sensor. The market for each product is known if the products can be successfully developed. However, there is some chance that it will not be possible to successfully develop them. Revenue of $1,000,000 would be realized from selling the temperature sensor and revenue of $400,000 would be realized from selling the pressure sensor. Both amounts are net of production cost but do not include development cost. If development is unsuccessful for a product, then there will be no sales, and the development cost will be totally lost. Development cost would be $100,000 for the temperature sensor and $10,000 for the pressure sensor. The probability that the development of the sensor will be successful is 0.50 for the temperature sensor and 0.80 for the pressure sensor. The company is also expected to pay out a dividend of $9.975 at the end of the year. The dividend is expected to grow at a constant rate of 5.5% each year. The price of the company's common stock is $105 per share. They have debt on their books with a pre-tax cost of 12.5%. The tax rate is 40%. JYL Limited is planning to expand into the hotel industry in Barbados. They have identified and assessed two business investment ventures. Each venture has a useful life of six years. The following information is presented for the two ventures: N.B. The Capital structure of JYLLimited is 60% equity and 40% debt. South Gap $30 000 000 $ Initial Investment Annual Cash Flows: 1 2 3 4 5 000 000 7 500 000 8 500 000 9 250 000 10 750 000 15 250 000 6 000 000 4 050 000 4 080 000 3 700 000 N.B. The projects should be discounted using the company's current capital structure. Required: Blue Horizon $30 000 000 $ 5 6 4 000 000 6 200 000 a. Prepare a decision tree that outlines the expected values of the expansion options.

INSTRUCTION: JLY Limited wants absorb some short-term excess production capacity at its plant, the company is considering a short manufacturing run for either of two new products, a temperature sensor or a pressure sensor. The market for each product is known if the products can be successfully developed. However, there is some chance that it will not be possible to successfully develop them. Revenue of $1,000,000 would be realized from selling the temperature sensor and revenue of $400,000 would be realized from selling the pressure sensor. Both amounts are net of production cost but do not include development cost. If development is unsuccessful for a product, then there will be no sales, and the development cost will be totally lost. Development cost would be $100,000 for the temperature sensor and $10,000 for the pressure sensor. The probability that the development of the sensor will be successful is 0.50 for the temperature sensor and 0.80 for the pressure sensor. The company is also expected to pay out a dividend of $9.975 at the end of the year. The dividend is expected to grow at a constant rate of 5.5% each year. The price of the company's common stock is $105 per share. They have debt on their books with a pre-tax cost of 12.5%. The tax rate is 40%. JYL Limited is planning to expand into the hotel industry in Barbados. They have identified and assessed two business investment ventures. Each venture has a useful life of six years. The following information is presented for the two ventures: N.B. The Capital structure of JYLLimited is 60% equity and 40% debt. South Gap $30 000 000 $ Initial Investment Annual Cash Flows: 1 2 3 4 5 000 000 7 500 000 8 500 000 9 250 000 10 750 000 15 250 000 6 000 000 4 050 000 4 080 000 3 700 000 N.B. The projects should be discounted using the company's current capital structure. Required: Blue Horizon $30 000 000 $ 5 6 4 000 000 6 200 000 a. Prepare a decision tree that outlines the expected values of the expansion options.