Marli Limited manufactures security equipment used extensively by the financial services industry. The company incurs significant research costs in developing its products to meet the demands of this highly competitive market. The companys research team has recently developed a new piece of software which they believe will significantly improve detection rates and will lead to significant cost savings for its clients. The company had carried out a viability study at a cost of $ 80,000 which indicates that the new product will generate the following estimated net cash flows for the company:

Year	$000
0	(600,000)
1- 4	240,000

Required:

1. Calculate the Net Present Value for the project based on the estimated net cash flows shown above. The company uses a cost of capital of 13%.

(4 marks)

Unfortunately a rumoured development by a competitor now makes the project subject to much greater uncertainty and the board has asked you to incorporate this uncertainty into the net present value calculation. The project will still require the same cash outlay of $600,000 in year 0 however the future cash flows are now in greater doubt and the following revised outcomes are now possible:

Outcome	Year 1	Probability	Year 2-4	Probability
	$000		$000
1	200	0.5	320	0.6
2	200	0.5	240	0.4
3	280	0.5	240	0.7
4	280	0.5	0	0.3

Required:

2. Calculate the Expected Net Present Value and the standard deviation for the project based on the revised cash flows. You must show all workings.

(24 marks)

3. Using the z statistic calculate the probability of the project having a negative Net Present Value

(4 marks)

4. Evaluate the results of your calculations and advise Marli whether they should proceed with the project or not.

(8 marks)

TOTAL 40 MARKS