Let's recall Example 11.4, where Capstone engineers have created three different scenarios based on the key input variables expressed in terms of three-point esti- mates in Example 11.1. If we examine the annual cash flows under each scenario, we find the following values: Annual Cash Flow Estimates (unit: $000) Worst-Case Scenario (Table 11.4) Most Likely Scenario (Table 11.1) Best-Case Scenario (Table 11.5) M. ($55,000) ($55,000) ($55,000) $35,244 1 $1,944 $16,344 $4,314 $19,488 $40,368 3 $2,904 $18,893 $41,938 4 $1,937 $18,785 $44,197 5 $8,600 $28,152 $56,750 Using these annual cash flow estimates as three-point estimates for each period, compute the mean and variance of the NPW distribution.
Reconsider Example 11.6, where the expected cash flows for the Capstone project are
Period 0 1 2 3 4 5
Cash Flow -$55,000 $17,094 $20,439 $20,069 $20,212 $29,660
Suppose that Capstone consider the MicroCHP project to be just one of their normal risky projects. Then the appropriate discount rate to use is 15%. However, Capstone considers the MicroCHP project to be much riskier than normal projects, so it believes an additional risk premium of 6.93% should be added. If management has decided to use a risk-adjusted discount rate of 21.93% to compensate for the uncertainty of the cash flows, is this project acceptable?
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