Bradford Services Inc. (BSI) is considering a project that has a cost of $10 million and an expected life of 3 years. There is a 30 percent probability of good conditions, in which case the project will provide a cash flow of $9 million at the end of each year for 3 years.There is a 40 percent probability of medium conditions, in which case the annual cash flows will be $4 million, and there is a 30 percent probability of bad conditions and a cash flow of -$1 million per year. BSI uses a 12 percent cost of capital to evaluate projects like this.

Problem 1: Find the project's expected cashflow and NPV

Condition

Probability

Cash Flow

Prob.*Cash Flow

Good

0.3

$9

.3 X 9=2.7

Medium

0.4

$4

.4 X 4 = 1.6

Bad

0.3

-$1

.3 X -1 = -0.3

Expected CF

4

Expected CF =

2.7 + 1.6 + (-.3) = 4

T=0

T=1

T=2

T=3

CF

-10

4

4

4

NPV of Project =

CF0=-10

Co1=4

F01=1

I=12

NPV= -.39

What can you conclude regarding this project?

Reject because the NPV is negative and to risky

Problem 2: find the project's standard deviation and coefficient variation?

npv good condition?

Npv Medium condition?

npv bad condition?

Variance?

coefficient variation?