8.8 Kernow Cleaning Services Ltd provides street-cleaning services for local councils in the far south west of England. The work is currently labour-intensive and few machines are used. 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.
Required:

(a) Calculate the expected net present value (ENPV) of the street-cleaning machines.

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

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