5. The Blazingame Corporation is considering a three-year project that has an initial cash outflow (C0) of $175,000 and three cash inflows that are defined by the following independent probability distributions. All dollar figures are in thousands.

Blazingame’s cost of capital is 10%.

a. Estimate the project’s most likely NPV by using a point estimate of each cash flow. What is its probability?

b. What are the best and worst possible NPVs? What are their probabilities?

c. Choose a few outcomes at random, calculate their NPVs and the associated probabilities, and sketch the probability distribution of the project’s NPV.
[Hint: The project has 27 possible cash flow patterns (3 3 3), each of which is obtained by selecting one cash flow from each column and combining with the initial outflow. The probability of any pattern is the product of the probabilities of its three uncertain cash flows. For example, a particular pattern might be as follows.

The probability of this pattern would be .25 .25 .50 .03125.]

Transcribed Image Text:

C C C3 Probability $50 $ 40 $75 .25 60 80 80 .50 70 120 85 .25