Citron buys a counterfeit production line at a price of €200,000. However, the cash flow that will result from the three-year production of the product depends on the conditions of demand in the  plastics industry. Specifically, 3 versions of demand are formed, the high, the normal and the low, with equalprobabilities for any eventuality. Demand is expressed as follows (in euro):   Demand / Year 1st 2nd 3rd High 100.000€ 120.000€ 130.000€ Normal 75.000€ 80.000€ 95.000€ Low 65.000€ 70.000€ 82.000€ a) How will this investment be valued if the equipment has a residual value of € 20,000 at the end of the 3rd year, the market rate for such activities is set at 8% and the risk-free rate at 5%?

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
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Citron buys a counterfeit production line at a price of €200,000.

However, the cash flow that will result from the three-year production of the product depends on the conditions of demand in the  plastics industry. Specifically, 3 versions of demand are formed, the high, the normal and the low, with equalprobabilities for any eventuality. Demand is expressed as follows (in euro):

 

Demand / Year

1st

2nd

3rd

High

100.000€

120.000€

130.000€

Normal

75.000€

80.000€

95.000€

Low

65.000€

70.000€

82.000€

  1. a) How will this investment be valued if the equipment has a residual value of € 20,000 at the end of the 3rd year, the market rate for such activities is set at 8% and the risk-free rate at 5%?
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