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1 (30 marks) Cargo Investment Ltd has made following estimates of the Cash flow after taxes (CFAT) of the proposed project. The company use decision
1 (30 marks) Cargo Investment Ltd has made following estimates of the Cash flow after taxes (CFAT) of the proposed project. The company use decision tree analysis to get clear picture of project's cash inflow. The project cost N$80,000 and the expected life of the project is 2 years. The net cash inflows are: In year 1, there is 0.4 probability that Cash flow after taxes will be N$50,000 and 0.6 probability that Cash flow after taxes will be N$60,000. The probabilities assigned to cash flow after taxes for year 2 are as follows: If Cash flow = N$50,000 24,000 32,000 44,000 Probability 0.2 0.3 0.5 If Cash flow = N$60,000 Probability 40,000 0.4 50,000 0.5 60,000 0.1 The firm uses 10% discount rate for this type of investments. Required: i. Calculate the expected NPV of the project and determine whether the company should invest on the basis of expected NPV (21marks) ii. Draw a decision tree to depict the information in (i) above. (9 Marks)
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