Pediatric Partners is evaluating a project with the following net cash flows and probabilities: Year Prob.=0.25 Prob.=0.50 Prob.=0.25 ($75,000) 1 $ 2 $ 3 $ 4 $ 5 $ ($75,000) ($75,000) 15,000 $ 20,000 $ 30,000 20,000 $ 30,000 20,000 $ 30,000 20,000 $ 30,000 30,000 $ 40,000 15,000 $ 15,000 $ 15,000 $ 20,000 $ The year 5 values include salvage values. Pediatric Partners' corporate cost of capital is 12% (a) What is the project's expected NPV assuming average risk? (b) What are the project's most likely, worst-case, and best case NPVS? (c) What is the project's expected NPV on the basis of the scenario analysis? (d) What is the project's standard deviation of NPV?
Pediatric Partners is evaluating a project with the following net cash flows and probabilities: Year Prob.=0.25 Prob.=0.50 Prob.=0.25 ($75,000) 1 $ 2 $ 3 $ 4 $ 5 $ ($75,000) ($75,000) 15,000 $ 20,000 $ 30,000 20,000 $ 30,000 20,000 $ 30,000 20,000 $ 30,000 30,000 $ 40,000 15,000 $ 15,000 $ 15,000 $ 20,000 $ The year 5 values include salvage values. Pediatric Partners' corporate cost of capital is 12% (a) What is the project's expected NPV assuming average risk? (b) What are the project's most likely, worst-case, and best case NPVS? (c) What is the project's expected NPV on the basis of the scenario analysis? (d) What is the project's standard deviation of NPV?
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
Problem 1PS
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Transcribed Image Text:Pediatric Partners is evaluating a project with the following net cash flows and probabilities:
| Year | Prob.=0.25 | Prob.=0.50 | Prob.=0.25 |
|------|------------|------------|------------|
| 0 | ($75,000) | ($75,000) | ($75,000) |
| 1 | $15,000 | $20,000 | $30,000 |
| 2 | $15,000 | $20,000 | $30,000 |
| 3 | $15,000 | $20,000 | $30,000 |
| 4 | $15,000 | $20,000 | $30,000 |
| 5 | $20,000 | $30,000 | $40,000 |
The year 5 values include salvage values. Pediatric Partners' corporate cost of capital is 12%.
**Questions:**
(a) What is the project's expected NPV assuming average risk?
(b) What are the project's most likely, worst-case, and best-case NPVs?
(c) What is the project's expected NPV on the basis of the scenario analysis?
(d) What is the project's standard deviation of NPV?
**Explanation of Probabilities and Cash Flows:**
- There are three sets of cash flow scenarios for the project, each associated with a different probability: 0.25 for the first scenario, 0.50 for the second scenario, and 0.25 for the third scenario.
- The initial investment is consistent across all scenarios at ($75,000).
- Cash flows for years 1 to 5 vary across the three scenarios, with the third scenario (Prob.=0.25) having the highest potential inflows each year.
- The project's cash flows incorporate salvage values in Year 5.
These scenarios help in evaluating the project's potential outcomes based on varying assumptions and market conditions.
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