Reconsider Example 11.6, where the expected cash flows for the Capstone project arePeriod 0 1 2 3 4 5Cash Flow -$55,000 $17,094 $20,439 $20,069 $20,212 $29,660Suppose that Capstone consider the MicroCHP project to be just one of their normal risky projects. Then the appropriate discount rate to use is 15%. However, Capstone considers the MicroCHP project to be much riskier than normal projects, so it believes an additional risk premium of 6.93% should be added. If management has decided to use a risk-adjusted discount rate of 21.93% to compensate for the uncertainty of the cash flows, is this project acceptable? Let's recall Example 11.4, where Capstone engineers have created three differentscenarios based on the key input variables expressed in terms of three-point esti-mates in Example 11.1. If we examine the annual cash flows under each scenario,we find the following values:Annual Cash Flow Estimates (unit: $000)Worst-Case Scenario(Table 11.4)Most Likely Scenario(Table 11.1)Best-Case Scenario(Table 11.5)M.($55,000)($55,000)($55,000)$35,2441$1,944$16,344$4,314$19,488$40,3683$2,904$18,893$41,9384$1,937$18,785$44,1975$8,600$28,152$56,750Using these annual cash flow estimates as three-point estimates for each period,compute the mean and variance of the NPW distribution.

The net present value is the worth of a project in current terms. It is a technique used in capital…

Answered: Let's recall Example 11.4, where…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter11: Capital Budgeting And Risk

Section: Chapter Questions

Problem 1P

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Reconsider Example 11.6, where the expected cash flows for the Capstone project are
Period 0 1 2 3 4 5
Cash Flow -$55,000 $17,094 $20,439 $20,069 $20,212 $29,660
Suppose that Capstone consider the MicroCHP project to be just one of their normal risky projects. Then the appropriate discount rate to use is 15%. However, Capstone considers the MicroCHP project to be much riskier than normal projects, so it believes an additional risk premium of 6.93% should be added. If management has decided to use a risk-adjusted discount rate of 21.93% to compensate for the uncertainty of the cash flows, is this project acceptable?

Let's recall Example 11.4, where Capstone engineers have created three different
scenarios based on the key input variables expressed in terms of three-point esti-
mates in Example 11.1. If we examine the annual cash flows under each scenario,
we find the following values:
Annual Cash Flow Estimates (unit: $000)
Worst-Case Scenario
(Table 11.4)
Most Likely Scenario
(Table 11.1)
Best-Case Scenario
(Table 11.5)
M.
($55,000)
($55,000)
($55,000)
$35,244
1
$1,944
$16,344
$4,314
$19,488
$40,368
3
$2,904
$18,893
$41,938
4
$1,937
$18,785
$44,197
5
$8,600
$28,152
$56,750
Using these annual cash flow estimates as three-point estimates for each period,
compute the mean and variance of the NPW distribution.

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