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a. The expected cash flow for the new business is $ (Round to the nearest dollar.)

a. The expected cash flow for the new business is $ (Round to the nearest dollar.)

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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i Data Table Scenario I: Recession Scenario II: Expanding 18% Scenario II: Normal 53% $153,000 (Click on the icon O in order to copy its contents into a spreadsheet.) Probability 29% Cash flow S(54,000) $251,000 Print Done
Transcribed Image Text:i Data Table Scenario I: Recession Scenario II: Expanding 18% Scenario II: Normal 53% $153,000 (Click on the icon O in order to copy its contents into a spreadsheet.) Probability 29% Cash flow S(54,000) $251,000 Print Done
(Related to Checkpoint 13.1) (Forecasting cash flows using the expected value) Koch Transportation is contemplating the acquisition of LH Transport, a competing trucking firm. Koch's CFO estimates that during the next year LH Transport's cash flows from the acquisition will vary depending on the state of the local economy: a. Calculate the expected cash flow for next year using the estimates provided above. b. Assume the probability of a recession increases to 38 percent, the normal scenario probability remains at 53 percent, and the expansion probability drops to only 9 percent. What is your estimate of the expected cash flow for next year under these circumstances? c. Your analysis of the acquisition suggests that for the investment to have at least a zero NPV, it must produce an annual expected cash flow of $83,610 per year over the next five years. Assuming that the cash flow you estimated in part a is the expected cash flow for Years one through five, what would you like to know about the project cash flows to make you more comfortable with the idea that you can indeed generate the requisite $83,610 per year cash flow? (No computations required.) a. The expected cash flow for the new business is $1. (Round to the nearest dollar.)
Transcribed Image Text:(Related to Checkpoint 13.1) (Forecasting cash flows using the expected value) Koch Transportation is contemplating the acquisition of LH Transport, a competing trucking firm. Koch's CFO estimates that during the next year LH Transport's cash flows from the acquisition will vary depending on the state of the local economy: a. Calculate the expected cash flow for next year using the estimates provided above. b. Assume the probability of a recession increases to 38 percent, the normal scenario probability remains at 53 percent, and the expansion probability drops to only 9 percent. What is your estimate of the expected cash flow for next year under these circumstances? c. Your analysis of the acquisition suggests that for the investment to have at least a zero NPV, it must produce an annual expected cash flow of $83,610 per year over the next five years. Assuming that the cash flow you estimated in part a is the expected cash flow for Years one through five, what would you like to know about the project cash flows to make you more comfortable with the idea that you can indeed generate the requisite $83,610 per year cash flow? (No computations required.) a. The expected cash flow for the new business is $1. (Round to the nearest dollar.)
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