Question
MG Cutting Systems is considering an investment project with the followingparameters, where all cost and revenue gures are estimated in constant dollars: - The project
MG Cutting Systems is considering an investment project with the followingparameters, where all cost and revenue gures are estimated in constant dollars: - The project requires the purchase of a $23,000 asset, which will be usedfor only 2 years (project life). The project also requires an investment od$3,000 in working capital, and this amount will be fully recovered at theend of year 2. - The salvage value of this asset at the end of two years is expected to be$6,000. - The annual revenue and the general ination rate are discrete randomvariables but can be described by the following probability distributions:
Annual Revenue (X), Probability, General Ination Rate (V), Probability
$15,000 0.20 3% 0.25
$25,000 0.50 5% 0.50
$35,000 0.30 7% 0.25
Both random variables are statistically independent. - The investment will be classied as a three-year MACRS property (taxlife). - It is assumed that the revenues, salvage value, and working capital areresponsive to the general ination rate. - The revenue and ination rate dedicated during the rst year will prevailover the remaining project period. - The marginal income-tax rate for the rm is 40%. The rm ination-freeinterest rate is 10%. (a) Determine the PW as a function of X.(b) Compute the expected NPW of this investment.(c) Compute the variance of the PW of this investment.
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