COST-BENEFIT ANALYSIS Listed in the diagram for Problem 7 are some probability estimates of the costs and benefits associated with two competing projects. a. Compute the net present value of each alter native. Round off the cost projections to the nearest month. Explain what happens to the answer if the probabilities of the recurring costs are in correct, and a more accurate estimate is as follows: в 0.4 $ 85,000 0.4 100,000 0.2 110,000 A 0.10 $ 75.000 95,000 105,000 0.55 0.35 b. Repeat step (a) for the payback method. c. Which method do you think provides the best source of information? Why?
COST-BENEFIT ANALYSIS Listed in the diagram for Problem 7 are some probability estimates of the costs and benefits associated with two competing projects. a. Compute the net present value of each alter native. Round off the cost projections to the nearest month. Explain what happens to the answer if the probabilities of the recurring costs are in correct, and a more accurate estimate is as follows: в 0.4 $ 85,000 0.4 100,000 0.2 110,000 A 0.10 $ 75.000 95,000 105,000 0.55 0.35 b. Repeat step (a) for the payback method. c. Which method do you think provides the best source of information? Why?
COST-BENEFIT ANALYSIS Listed in the diagram for Problem 7 are some probability estimates of the costs and benefits associated with two competing projects. a. Compute the net present value of each alter native. Round off the cost projections to the nearest month. Explain what happens to the answer if the probabilities of the recurring costs are in correct, and a more accurate estimate is as follows: в 0.4 $ 85,000 0.4 100,000 0.2 110,000 A 0.10 $ 75.000 95,000 105,000 0.55 0.35 b. Repeat step (a) for the payback method. c. Which method do you think provides the best source of information? Why?
Looking for help on this question in attached image. Ive never seen probabilities in NPV like this.
Transcribed Image Text:**COST-BENEFIT ANALYSIS**
Listed in the diagram for Problem 7 are some probability estimates of the costs and benefits associated with two competing projects.
**a. Compute the net present value of each alternative. Round off the cost projections to the nearest month. Explain what happens to the answer if the probabilities of the recurring costs are incorrect, and a more accurate estimate is as follows:**
| Probability | Cost A | Probability | Cost B |
|-------------|-----------|-------------|-----------|
| 0.10 | $75,000 | 0.4 | $85,000 |
| 0.55 | $95,000 | 0.4 | $100,000 |
| 0.35 | $105,000 | 0.2 | $110,000 |
**b. Repeat step (a) for the payback method.**
**c. Which method do you think provides the best source of information? Why?**
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**Diagram Explanation:**
The chart below titled "Problem 7: Cost-Benefit Analysis" contains detailed probability estimates and costs for projects A and B. The cost of capital is specified as 0.14.
### **Project A:**
- **Project completion time:**
- 50% probability for 12 months
- 30% probability for 18 months
- 20% probability for 24 months
- **Expected useful life:**
- 20% probability for 3 years
- 15% probability for 4 years
- 60% probability for 5 years
- 5% probability for 6 years
- **One-time costs:**
- 35% probability for $200,000
- 45% probability for $250,000
- 20% probability for $300,000
- **Recurring costs:**
- 10% probability for $75,000
- 55% probability for $95,000
- 35% probability for $105,000
- **Annual tangible benefits starting with the average weighted completion date:**
- 30% probability for $220,000
- 50% probability for $230,000
- 20% probability for $240,000
### **Project B:**
- **Project completion time:**
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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