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  3. 3 for this decision tree question all the information is...

Question: 3 for this decision tree question all the information is...

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3. For this decision tree question all the information is about costs, so when comparing the expected net present value, you are looking for the decisions with the lowest cost. Also assume all values are already in present value terms. (no discounting required) A forest company is deciding on whether or not to comply with government regulations regarding harvesting practices. The cost of compliance is $100,000. The cost of non compliance involves uncertainty. There is a 70% chance of not being caught in which case the firm avoids all costs. However there is a 30% chance that the firm will be caught. If the firm is caught, there is a 25% chance that the fine will be small. Otherwise the fine will be large. If the fine is small the firm will pay the fine of $200,000. If however, the fine is large, then the firm must decide whether to just pay the fine of $400,000 or fight it in court. If the firm decides to fight the fine, lawyer costs are $50,000. In court there is a 50% chance that the firm will have to pay the $400,000 fine; there is a 20% chance that the firm will have to pay a $220,000 fine and a 30% chance that the firm will not have to pay a fine at all Calculate the expected present value of the cost of non compliance. Should the firm comply with the regulation? Show your decision tree.
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