Cryonics Limited is planning to launch a new product, which can be introduced initially in Western India or in the entire country.

If the product is introduced only in Western India, the investment outlay will be Rs.30 million. After two years, Cryonics can evaluate the project to determine whether it should cover the entire country. For such expansion, it will have to incur an additional investment of Rs.25 million. To introduce the product in the entire country right in the beginning would involve an outlay of Rs.50 million. The product, in any case, will have a life of 5 years, after which the plant will have a zero net salvage value. If the product is introduced only in Western India, the demand would be high or low with probabilities of 0.8 and 0.2 respectively and annual cash inflows of Rs.10 million and Rs.6.25 million respectively. If the product is introduced in the entire country right in the beginning the demand would be high or low with probabilities of 0.6 and 0.4 and annual cash inflows of Rs.20 million and Rs.12.5 million respectively. Based on the observed demand in Western India, if the product is introduced in the entire country the following probabilities would exist for high and low demand on an AllIndia basis.

All India Western India High demand Low demand High demand 0.90 0.10 Low demand 0.40 0.60 The hurdle rate applicable to the project is 12 percent. (a) Set up a decision tree for the investment situation of Cryonics Limited. (b) Advise Cryonics Limited on the investment policy it should follow. Support your advice with appropriate reasoning.