2. McGregor is proposing a project that would require an initial investment of $855,000. The project is expected to generate $300.000 at the end of the second year. $500,000 at the end of the third year and $600,000 at the end of the fourth year. However, the company has realized that the market condition may be unstable in the next few years. To adjust for this uncertainty, McGregor chooses not to adjust the discount rate but rather assessing chances of failure for each year that no cash flow will be produced. The company expects a 25% chance of failure for the cash flow in year 2. 30% chance of failure for the cash flow in year 3. and 35% chance of failure for the cash flow in year 4. (Note that the success or failure of each cash flow is independent with others.) What is the Net Present Value (NPV) of the project with and without an assessment about the chances of failure for cash flows? Comment about how an assessment on changing project risk can affect the decision of a financial manager. |