The Yoran Yacht Company (YYC) a prominent sailboat builder in Newport may design a new 30 foot sailboat based on the winged keels first introduced on the 12 meter yachts that raced for the America’s cup.First YYC would have to invest $10 000 at t=0 for the design and model tank testing of the new boat. YYC’s managers believe that there is a 60% probability that this phase will be successful and the project will continue. If stage 1 is not successful; the project will be abandoned with zero salvage value.The next stage if undertaken would consist of making the molds and producing two prototype boats. This would cost $500 000 at t=1. If the boats test well YYC would go into production. If they do not the molds and prototypes could be sold for $100 000. The managers estimate that the probability is 80% that the boats will pass testing and that stage 3 will be undertaken.Stage 3 consists if converting an unused production line to prouce the new design. This would cost $1 000 000 at t=2. If the economy is strong at this point the net value of sales would be $3 000 000 while if the economy is weak the net value would be $1 500 000. Both net values occur at t=3 and each state of the economy has a probability of 0.5. YYC’s marginal cost of capital is 12%.a) Assume that this project has average risk. Construct a decision tree and determine the projects expected NPV.b) Find the project’s standard deviation pf NPV and coefficient of variation (CV) of NPV. If YYC’s average project had a CV of between 1.0 and 2.0 would this project be high low or average stand alone risk?
