Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Expected value analysis: Home Garden Inc. Home Garden Inc. is considering the construction of a distribution warehouse in West Virginia to service its east coast
Expected value analysis: Home Garden Inc. Home Garden Inc. is considering the construction of a distribution warehouse in West Virginia to service its east coast stores based on the following estimates: Construction cost of warehouse Residual value Useful life Estimated annual net cost savings $20,000,000 to $25,000,000 $3,000,000 25 years $2,500,000 to $4,000,000 Assume Home Garden Inc. assigns the following probabilities to the estimated construction cost of the warehouse and annual net cash flows: Construction Probability. Probability. Cost of Occurring Annual Net Cash Flow of Occurring $20,000,000 0.55 $4,000,000 0.50 23,000,000 0.30 3,000,000 0.36 25,000,000 0.15 2,500,000 0.14 Total 1.00 Total 1.00 a. Compute the expected value of the construction cost. Construction Cost $20,000,000 23,000,000 25,000,000 Check My Work Expected Value 11,000,000 6,900,000 3,750,000 21 650 nnn Previous a. Compute the expected value of the construction cost. Construction Cost $20,000,000 23,000,000 25,000,000 Total Expected Value 11,000,000 6,900,000 3,750,000 21,650,000 b. Compute the expected value of the annual net cash flows. Annual Net Cash Flow $4,000,000 Expected Value 2,000,000 1,080,000 3,000,000 2,500,000 Total 350,000 3,430,000 c. Determine the expected net present value of building the distribution warehouse, assuming a desired rate of return of 14% and using the expected values computed in parts (a) and (b). Use the Present Value of $1 at Compound Interest and Present Value of Ordinary Annuity. Round to the nearest dollar. Net present value x d. Should Home Garden Inc. build the distribution warehouse? Yes, the project can be taken and completed. Reason for the decision: (a) The net.cash.inflown in higher and in bits increases the profitability of the business
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started