(ST–2)

Corporate Risk Analysis The staff of Porter Manufacturing has estimated the following net after-tax cash flows and probabilities for a new manufacturing process:

Net After-Tax Cash Flows Year P = 0.2 P = 0.6 P = 0.2 0 −$100,000 −$100,000 −$100,000 1 20,000 30,000 40,000 2 20,000 30,000 40,000 3 20,000 30,000 40,000 4 20,000 30,000 40,000 5 20,000 30,000 40,000 5* 0 20,000 30,000 Line 0 gives the cost of the process, Lines 1 through 5 give operating cash flows, and Line 5* contains the estimated salvage values. Porter’s cost of capital for an averagerisk project is 10%.

a. Assume that the project has average risk. Find the project’s expected NPV.

(Hint: Use expected values for the net cash flow in each year.)