PROBLEM 9-10 INDEPENDENT CASH FLOW AND CAPITAL BUDGETING UNDER UNCERTAINTIESCable Corporation has determined the following discrete probability distributions for the netcash flow generated by acontemplated project.Period 1Probability0.100.250.300.250.10Cash Flow4,0005,0006,0007,0008,000Period 2Probability0.100.250.300.250.10Cash Flow3,0004,0005,0006,0007,000Period 3Probability0.100.250.300.250.10Cash Flow2,0003,0004,0005,0006,000Rec7231.2.3.OBLETi.iRequired1. Assume the probability distributions of cash flow for future periods are independent. Also assume that theafter-tax, risk-free rate is 4 percent. If the project requires an initial outlay Rs. 10,000, determine theexpected value of the net-present value.Determine the standard deviation about the expected value.2.3. What is the probability that the project will have a net present value of (a) greater than zero,(b) less than zero; (c) more than Rs. 4,000.Ans: (1) Rs. 3,948; (2) Rs. 1827.72 (3) (a) 98.46% (b) 1.54% (c) 48.80%

The expected net present value: When the cash flows for each period are uncertain, the probable cash…

PROBLEM 9-10 INDEPENDENT CASH FLOW AND CAPITAL BUDGETING UNDER UNCERTAINTIES Cable Corporation has determined the following discrete probability distributions for the net. cash flow generated by a contemplated project. Period 2 Period 1 Probability 0.10 0.25 0.30 0.25 0.10 Cash Flow 4,000 5,000 6,000 7,000 8,000 Probability 0.10 0.25 0.30 0.25 0.10 Cash Flow 3,000 4,000 5,000 6,000 7,000 Period 3 Probability 0.10 0.25 0.30 0.25 0.10 1927 72 Cash Flow 2,000 3,000 4,000 5,000 6,000 Required 1. Assume the probability distributions of cash flow for future periods are independent. Also assume that after-tax, risk-free rate is 4 percent. If the project requires an initial outlay Rs. 10,000, determine expected value of the net-present value. 2. Determine the standard deviation about the expected value. 3. What is the probability that the project will have a net present value of (a) greater than (b) less than zero; (c) more than Rs. 4,000. 16% () 1 5 1966)

PROBLEM 9-10 INDEPENDENT CASH FLOW AND CAPITAL BUDGETING UNDER UNCERTAINTIES Cable Corporation has determined the following discrete probability distributions for the net. cash flow generated by a contemplated project. Period 2 Period 1 Probability 0.10 0.25 0.30 0.25 0.10 Cash Flow 4,000 5,000 6,000 7,000 8,000 Probability 0.10 0.25 0.30 0.25 0.10 Cash Flow 3,000 4,000 5,000 6,000 7,000 Period 3 Probability 0.10 0.25 0.30 0.25 0.10 1927 72 Cash Flow 2,000 3,000 4,000 5,000 6,000 Required 1. Assume the probability distributions of cash flow for future periods are independent. Also assume that after-tax, risk-free rate is 4 percent. If the project requires an initial outlay Rs. 10,000, determine expected value of the net-present value. 2. Determine the standard deviation about the expected value. 3. What is the probability that the project will have a net present value of (a) greater than (b) less than zero; (c) more than Rs. 4,000. 16% () 1 5 1966)

Fundamentals of Financial Management (MindTap Course List)

15th Edition

ISBN:9781337395250

Author:Eugene F. Brigham, Joel F. Houston

Publisher:Eugene F. Brigham, Joel F. Houston

Chapter11: The Basics Of Capital Budgeting

Section: Chapter Questions

Problem 11P: CAPITAL BUDGETING CRITERIA: MUTUALLY EXCLUSIVE PROJECTS Project S costs 17,000, and its expected...

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CAPITAL BUDGETING CRITERIA: MUTUALLY EXCLUSIVE PROJECTS Project S costs 17,000, and its expected cash flows would be 5,000 per year for 5 years. Mutually exclusive Project L costs 30,000, and its expected cash flows would be 8,750 per year for 5 years. If both projects have a WACC of 12%, which project would you recommend? Explain.
CAPITAL BUDGETING CRITERIA: MUTUALLY EXCLUSIVE PROJECTS A firm with a WACC of 10% is considering the following mutually exclusive projects: Which project would you recommend? Explain.
Ch. 6. Capital Budgeting with Inflation. For questions 7 and 8 use the following information. Consider the following cash flows on two mutually exclusive projects: Year Project A Project B 0 -$60,000 -$75,000 1 $38,000 $40,000 2 $36,000 $42,000 3 $29,000 $46,000 The cash flows of Project A are expressed in real terms, whereas those of Project B are expressed in nominal terms. The appropriate nominal discount rate is 12 percent and the inflation rate is 3 percent. What is the NPV for Project A?
Ch. 6. Capital Budgeting with Inflation. For questions 7 and 8 use the following information. Consider the following cash flows on two mutually exclusive projects: Year Project A Project B 0 -$60,000 -$75,000 1 $38,000 $40,000 2 $36,000 $42,000 3 $29,000 $46,000 The cash flows of Project A are expressed in real terms, whereas those of Project B are expressed in nominal terms. The appropriate nominal discount rate is 12 percent and the inflation rate is 3 percent. What is the NPV for Project B? Round to the nearest cent and format as "XX,XXX.XX"
Question 18 Project A has the following estimated cash flows and present values:Year Cash flow $ Discount factor@ 12% Present value $0 Cost (95 000) 1.0 (95 000) 1–5 Contributionper annum 50 000 3.605 180 250 1–5 Fixed costsper annum (25 000) 3.605 (90 125) 5 Residual value 20 000 0.567 11 340 Required:Calculate the sensitivity of the investment decision to a change in the annual contribution.
Capital Budgeting Assume you are evaluating two mutually exclusive projects, the cash flows of which appear below and that your company uses a cost of capital of 13% to evaluate projects such as these. Time Project A Cash Flows Project B Cash Flows 0 -$46,800 -$63,600 1 -21,600 20,400 2 43,200 20,400 3 43,200 20,400 4 43,200 20,400 5 -28,800 20,400 Assuming a cost of capital of 13%, which of these projects should be accepted?