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Chapter Outline 8.1 Corporate Strategy and Positive NPV 8.2 Decision Trees 8.3 Sensitivity Analysis, Scenario Analysis, and Break-Even Analysis 8.4 Options 8.5 Summary and Conclusions Corporate Strategy and Positive NPV Introduce new products Apple Corporation and the mouse Develop core technology Honda and small engines Create barrier to entry Qualcomm’s patents on proprietary technology Introduce variations on existing products Chrysler’s PT Cruiser Create product differentiation Coca-Cola—it’s the real thing Utilize organizational innovation Motorola just-in-time inventory management Exploit a new technology Yahoo!’s use of banner advertisements on the web Corporate Strategy and the Stock Market There should be a connection between the stock market and capital budgeting. If the firm invests in a positive NPV projects, the firm’s stock price should go up. Sometimes the stock market provides negative clues as to a new project’s NPV. Consider ATT’s repeated attempts to penetrate the computer-manufacturing industry. 8.2 Decision Trees Allow us to graphically represent the alternatives available to us in each period and the likely consequences of our actions. Example of Decision Tree Stewart Pharmaceuticals The Stewart Pharmaceuticals Corporation is considering investing in developing a drug that cures the common cold. A corporate planning group, including representatives from production, marketing, and engineering, has recommended that the firm go ahead with the test and development phase. This preliminary phase will last one year and cost $1billion. Furthermore, the group believes that there is a 60% chance that tests will prove successful. If the initial tests are successful, Stewart Pharmaceuticals can go ahead with full-scale production. This investment phase will cost $1,600 million. Production will occur over the next 4 years. Stewart Pharmaceuticals NPV of Full-Scale Production following Successful Test Note that the NPV is calculated as of date 1,