Kernow Ltd provides street-cleaning services for a small town. The work is currently labour intensive and few machines are employed. However, the business has recently been considering the purchase of a fleet of street-cleaning vehicles at a total cost of £540,000. The vehicles have a life of four years and are likely to result in a considerable saving of labour costs. Estimates of the likely labour savings and their probability of occurrence are set out below:

Estimates for each year are independent of other years. The business has a cost of capital of 10 per cent.

(a) Calculate the ENPV of the street-cleaning machines.

(b) Calculate the NPV of the worst possible outcome and the probability of its occurrence.

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Year 1 Year 2 Year 3 Year 4 Estimated savings Probability of occurrence £ 80,000 160,000 200,000 140,000 220,000 250,000 140,000 200,000 230,000 100,000 170,000 200,000 0.3 0.5 0.2 0.4 0.4 0.2 0.4 0.3 0.3 0.3 0.6 0.1