XYZ Construction Company earned $900,000 this year and is trying to decide if they should purchase ABC Construction Company for the price of $995,982. ABC Construction is located in another part of the state and the purchase will expand their coverage area. However, it will take one year to modify the facility and upgrade the material laydown area.
Next year the company expects to earn $1,275,000 if the economy is favorable but only $725,000 if the economy is unfavorable. Estimates show a 71% probability of a favorable economy and a 29% probability of an unfavorable economy. There will be no increased revenue or profit if they do not purchase ABC Construction Company. Perform an analysis for this uncertainty by solving the following:
1. Draw a decision tree (you may draw it by hand ).
2. Considering a time value of money discount rate of 12%, determine the Net Present Value (NPV)?
3. Based on a 12% discount rate, state whether XYZ Construction should purchase the other company?
4. State whether XYZ Construction should purchase the other company if the discount rate is 17%?
5. Should ABC Construction be purchased if the discount rate where only 8%?