Question
Heywood Diagnostic Enterprises is evaluating a project with the following net cash flows and probabilities (Prob.): Year Prob. = 0.2 Prob. = 0.6 Prob. =
Heywood Diagnostic Enterprises is evaluating a project with the following net cash flows and probabilities (Prob.): Year Prob. = 0.2 Prob. = 0.6 Prob. = 0.2 0 ($100,000) ($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-case, and best-case NPVs? c. What is the projects expected NPV on the basis of the scenario analysis?
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