Exercise 2

Feta corp will buy a new line of production that costs 50.000 Euros. However the cashflow from the 3 year production of the product depends on the conditions of demand for dairy products. More specifically there are 3 possibilities with regards to demand (high,moderate,low) with equal possibilities for each event. The demand for the product (in euros) follows

Demand/Year	1	2	3
High	55000	57000	65000
Moderate	35000	40000	45000
Low	25000	28000	32000

1.The question is how you will value this investment if the equipment has residual value of 10.000 euros at the end of the third year, the interest in the market for this kind of activities is 4% and the risk free rate is 2%.

2. We suppose that market information cannot help us extract the discount rate, for this reason with use subjective criteria to evaluate the investment. So we calculate "the sure equivalent" by reducing the price for each year by 0,75 units for each unit of standard devation. How the NPV differs now ?