15.2 Heywood Diagnostic Enterprises is evaluating a project with the following net cash flows and probabilities:

Year Prob = 0.2 Prob = 0.6 Prob = 0.2 0

($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 30,000 40,000 50,000

The Year 5 values include salvage value. Heywoods corporate cost of capital is 10 percent. a. What is the projects expected (i.e., base case) NPV assuming average risk? (Hint: The base case net cash flows are the expected cash flows in each year.)

b. What are the projects most likely, worst, and best case NPVs?

c. What is the projects expected NPV on the basis of the scenario analysis?

d. What is the projects standard deviation of NPV?

e. Assume that Heywoods managers judge the project to have lower than-average risk. Furthermore, the companys policy is to adjust the corporate cost of capital up or down by 3 percentage points to account for differential risk. Is the project financially attractive?