A company purchases mechanical equipment worth 350,000 euros for the manufacture of a product. The demand that will occur during the 1st year of operation of the production unit can be high, normal, or low. Also affected are the demand levels that will appear in the 2nd year according to the following: ear 1 Year 2 Probability Demand Cash flow Probability Demand Cash flow 0,333 High 170.000€ 0,45 High 340.000€ 0,30 Normal 260.000€ 0,25 Low 204.000€ 0,333 Normal 136.000€ 0,40 High 260.000€ 0,30 Normal 238.000€ 0,30 Low 200.000€ 0,333 Low 102.000€ 0,30 High 238.000€ 0,40 Normal 204.000€ 0,30 Low 186.000€ The residual value of the equipment at the end of the period amounts to € 30,000. Assuming that the appropriate discount rate in the case of high demand is set on the capital market at 6%, 5% for normal and low demand. The appropriate discount factor for the calculation of NPV is 6%, The risk-free rate is 4%, how much is the NPV of the investment estimated?
A company purchases mechanical equipment worth 350,000 euros for the manufacture of a product. The demand that will occur during the 1st year of operation of the production unit can be high, normal, or low. Also affected are the demand levels that will appear in the 2nd year according to the following:
|
ear 1 |
|
Year 2 | |||
|
Probability |
Demand |
Cash flow |
Probability |
Demand |
Cash flow |
|
0,333 |
High |
170.000€ |
0,45 |
High |
340.000€ |
|
|
|
|
0,30 |
Normal |
260.000€ |
|
|
|
|
0,25 |
Low |
204.000€ |
|
0,333 |
Normal |
136.000€ |
0,40 |
High |
260.000€ |
|
|
|
|
0,30 |
Normal |
238.000€ |
|
|
|
|
0,30 |
Low |
200.000€ |
|
0,333 |
Low |
102.000€ |
0,30 |
High |
238.000€ |
|
|
|
|
0,40 |
Normal |
204.000€ |
|
|
|
|
0,30 |
Low |
186.000€ |
The residual value of the equipment at the end of the period amounts to € 30,000.
Assuming that the appropriate discount rate in the case of high demand is set on the capital market at 6%, 5% for normal and low demand.
The appropriate discount factor for the calculation of NPV is 6%,
The risk-free rate is 4%,
how much is the NPV of the investment estimated?
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