(i) Construct a decision tree for the proposed investment project and calculate the expected net present value (NPV). (ii) What net present value will the project yield, if worst outcome is realized? What is the probability of occurrence of this NPV? (iii) What will be the best outcome and the probability of that occurrence? (iv) Will the project be accepted?
(i) Construct a decision tree for the proposed investment project and calculate the expected net present value (NPV). (ii) What net present value will the project yield, if worst outcome is realized? What is the probability of occurrence of this NPV? (iii) What will be the best outcome and the probability of that occurrence? (iv) Will the project be accepted?
Chapter11: Capital Budgeting Decisions
Section: Chapter Questions
Problem 6EB: The management of Ryland International Is considering Investing in a new facility and the following...
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![A firm has an investment proposal, requiring an outlay of 80,000. The investment proposal is
expected to have two years economic life with no salvage value. In year 1, there is a 0.4
probability that cash inflow after tax will be 50,000 and 0.6 probability that cash inflow after
tax will be 60,000. The probability assigned to cash inflow after tax for the year 2 is as follows:
The cash inflow year 1
The cash inflow year 2
*24,000
*32,000
44,000
*50,000
Probability
0.2
0.3
0.5
40,000
€50,000
*60,000
*60,000
Probability
0.4
0.5
0.1
The firm uses a 10% discount rate for this type of investment.
Required:
(i)
Construct a decision tree for the proposed investment project and calculate the expected
net present value (NPV).
(ii)
What net present value will the project yield, if worst outcome is realized? What is the
probability of occurrence of this NPV?
(iii) What will be the best outcome and the probability of that occurrence?
(iv) Will the project be accepted?](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F61cced45-8556-470d-ad45-21c635ed9905%2F080ebae1-4ddd-47bb-be49-c0a71b365308%2Fi6cp31g_processed.jpeg&w=3840&q=75)
Transcribed Image Text:A firm has an investment proposal, requiring an outlay of 80,000. The investment proposal is
expected to have two years economic life with no salvage value. In year 1, there is a 0.4
probability that cash inflow after tax will be 50,000 and 0.6 probability that cash inflow after
tax will be 60,000. The probability assigned to cash inflow after tax for the year 2 is as follows:
The cash inflow year 1
The cash inflow year 2
*24,000
*32,000
44,000
*50,000
Probability
0.2
0.3
0.5
40,000
€50,000
*60,000
*60,000
Probability
0.4
0.5
0.1
The firm uses a 10% discount rate for this type of investment.
Required:
(i)
Construct a decision tree for the proposed investment project and calculate the expected
net present value (NPV).
(ii)
What net present value will the project yield, if worst outcome is realized? What is the
probability of occurrence of this NPV?
(iii) What will be the best outcome and the probability of that occurrence?
(iv) Will the project be accepted?
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