The firm invests $5 million in a one-year project today. There is a single cashflow at time 1. The firm estimates that there is a 60% chance of realizing $9 million and a 40% chance of realizing $5 million. What is the expected time 1 cashflow?

The firm invests $5 million in a one-year project today. There is a single cashflow at time 1. The firm estimates that there is a 60% chance of realizing $9 million and a 40% chance of realizing $5 million. What is the expected time 1 cashflow?

Financial And Managerial Accounting

15th Edition

ISBN:9781337902663

Author:WARREN, Carl S.

Publisher:WARREN, Carl S.

Chapter26: Capital Investment Analysis

Section: Chapter Questions

Problem 3CMA

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Concept explainers

Production Budget

A budget can be defined as a financial plan designed by an undertaking for a definite period in the future that can contribute towards enhancing the financial success of the business undertaking. It is used to estimate the revenue and expenses. The budget generally takes into account both current and future income and expenses.

Question

[NPV|weights] The firm invests $5 million in a one-year project today. There is a single cashflow at time 1. The firm estimates that there is a 60% chance of realizing $9 million and a 40% chance of realizing $5 million. What is the expected time 1 cashflow?

Definition Definition Calculation used to evaluate the investment and financing decisions that involve cash flows occurring over multiple periods. NPV is calculated as the difference between the present value of cash inflow and cash outflow. NPV is used for capital budgeting and investment planning as well as to compare similar investment alternatives.

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