In the course so far we have been assuming that we are 100% sure of the future cash flows. However, this is not the case our world is filled with uncertainty. This is why we resort to using Expected Net Present Value which is probabilistic. We consider many scenarios and calculate the overall ENPV as follows: ENPV = P PV Where pi is the probability of scenario i and PV is the present value of that scenario. So assume you are investor coming to Beirut in these tough times and want to invest your money here. You hire a big consultant called KGF who present to you the following three scenarios: Pessimistic: Lebanese GPD shrinks by 20% and every 1% in GDP shrinkage translates into 1,000 monthly decrease in your cashflow from the base case. Moreover, a new strain of covid will strike and this would lead to a decrease of 50% in your net cash flow for three months every three months during lockdown. Moreover, your landlord would become greedy and will request to increase the rent by 10% Base Case: Your initial investment is 10M. You will not make any revenue during the first 3 months. After that you will start making 50,000 every month and it increases by 2% every months for six months and decreases by 1% for 6months after that. These cycles happen continuously until the investment is over. You will employ 100 people they will work six days for 8 hrs each day. The base wage is 20$ and this is what all the entire staff will get. 20% of your staff are senior and they get a premium of $5 every hour after the first hour every day. You pay rent of 10,000 every month. Rent is constant where you are renting in downtown Beirut. Maintenance will be every other month at $2,000 Optimistic: The Lebanese economy will flourish since many tourists are coming as Lebanon will become very cheap due to currency depreciation. The GDP will increase by 5% and the country will be able to handle COVID will with no foreseeable lockdowns. You strike a deal with the O&M company and they decrease their fee by 30%. The chance of the first event occurring is 20%, the second 60% and the last 20% and KGF assume a study duration of 20 years and an interest rate of 24% yearly compounded monthly. WE ARE IN YEAR 2020. Do the necessary research and make all the assumptions to: a- Find the NPV of each scenario. b. Find the expected NPV and its standard deviation C- If we neglect the probabilities above and assume that we are following a PERT distribution what is the expected NPV and its standard deviation d- You hire another consultant ABC and these guys give you the same scenario but tell you that the nominal interest rate might vary from 12% to 36%. Conduct a sensitivity analysis and plot the NPV for each scenario by varying the interest rate e. These values assume that the exchange rate is $1=1500 LL and you are paying you everything in LBP. Consider the flowing scenarios: i. You paid the 10M in 2018 before the deflation of the currency and the rest starting 2020 at the market rate (all is at the market rate). Re adjust for $ ii. Everything is at the market rate Re adjust your numbers and update the NPV. Comment on the effects of inflation and what would the adjusted interest rate be. In the course so far we have been assuming that we are 100% sure of the future cash flows. However, this is not the case our world is filled with uncertainty. This is why we resort to using Expected Net Present Value which is probabilistic. We consider many scenarios and calculate the overall ENPV as follows: ENPV = P PV Where pi is the probability of scenario i and PV is the present value of that scenario. So assume you are investor coming to Beirut in these tough times and want to invest your money here. You hire a big consultant called KGF who present to you the following three scenarios: Pessimistic: Lebanese GPD shrinks by 20% and every 1% in GDP shrinkage translates into 1,000 monthly decrease in your cashflow from the base case. Moreover, a new strain of covid will strike and this would lead to a decrease of 50% in your net cash flow for three months every three months during lockdown. Moreover, your landlord would become greedy and will request to increase the rent by 10% Base Case: Your initial investment is 10M. You will not make any revenue during the first 3 months. After that you will start making 50,000 every month and it increases by 2% every months for six months and decreases by 1% for 6months after that. These cycles happen continuously until the investment is over. You will employ 100 people they will work six days for 8 hrs each day. The base wage is 20$ and this is what all the entire staff will get. 20% of your staff are senior and they get a premium of $5 every hour after the first hour every day. You pay rent of 10,000 every month. Rent is constant where you are renting in downtown Beirut. Maintenance will be every other month at $2,000 Optimistic: The Lebanese economy will flourish since many tourists are coming as Lebanon will become very cheap due to currency depreciation. The GDP will increase by 5% and the country will be able to handle COVID will with no foreseeable lockdowns. You strike a deal with the O&M company and they decrease their fee by 30%. The chance of the first event occurring is 20%, the second 60% and the last 20% and KGF assume a study duration of 20 years and an interest rate of 24% yearly compounded monthly. WE ARE IN YEAR 2020. Do the necessary research and make all the assumptions to: a- Find the NPV of each scenario. b. Find the expected NPV and its standard deviation C- If we neglect the probabilities above and assume that we are following a PERT distribution what is the expected NPV and its standard deviation d- You hire another consultant ABC and these guys give you the same scenario but tell you that the nominal interest rate might vary from 12% to 36%. Conduct a sensitivity analysis and plot the NPV for each scenario by varying the interest rate e. These values assume that the exchange rate is $1=1500 LL and you are paying you everything in LBP. Consider the flowing scenarios: i. You paid the 10M in 2018 before the deflation of the currency and the rest starting 2020 at the market rate (all is at the market rate). Re adjust for $ ii. Everything is at the market rate Re adjust your numbers and update the NPV. Comment on the effects of inflation and what would the adjusted interest rate be