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EXAMPLE 9.5 A firm has an opportunity to invest in a machine which will last 2 years, initially cost $125,000, and has the following estimated possible after-tax cash inflow pattern: In year 1, there is a 40 percent chance that the after-tax cash inflow will be $45,000, a 25 percent chance that it will be $65,000, and a 35 percent chance that it will be $90,000. In year 2, the after-tax cash inflow possibilities depend on the cash inflow that occurs in year 1; that is, the year 2 after-tax cash inflows are conditional probabilities. Assume that the firm's after-tax cost of capital is 12 percent. The estimated conditional after-tax cash inflows (ATCI) and probabilities are given below. EXAMPLE 9.5 A firm has an opportunity to invest in a machine which will last 2 years, initially cost $125,000, and has the following estimated possible after-tax cash inflow pattern: In year 1, there is a 40 percent chance that the after-tax cash inflow will be 545,000, a 25 percent chance that it will be $65,000, and a 35 percent chance that it will be $90,000. In year 2, the after-tax cash inflow possibilities depend on the cash inflow that occurs in year 1; that is , the year 2 after-tax cash inflows are conditional probabilities. Assume that the firm's after-tax cost of capital is 12 percent. The estimated conditional after-tax cash inflows (ATCI) and probabilities are given below. Year 1 $45000 $65000 $90000 Probability 40% 25% 35% Initial Investment $125,000 EXAMPLE 9.5 A firm has an opportunity to invest in a machine which will last 2 years, initially cost $125,000, and has the following estimated possible after-tax cash inflow pattern: In year 1, there is a 40 percent chance that the after-tax cash inflow will be $45,000, a 25 percent chance that it will be $65,000, and a 35 percent chance that it will be $90,000. In year 2, the after-tax cash inflow possibilities depend on the cash inflow that occurs in year 1; that is, the year 2 after-tax cash inflows are conditional probabilities. Assume that the firm's after-tax cost of capital is 12 percent. The estimated conditional after-tax cash inflows (ATCI) and probabilities are given below. EXAMPLE 9.5 A firm has an opportunity to invest in a machine which will last 2 years, initially cost $125,000, and has the following estimated possible after-tax cash inflow pattern: In year 1, there is a 40 percent chance that the after-tax cash inflow will be 545,000, a 25 percent chance that it will be $65,000, and a 35 percent chance that it will be $90,000. In year 2, the after-tax cash inflow possibilities depend on the cash inflow that occurs in year 1; that is , the year 2 after-tax cash inflows are conditional probabilities. Assume that the firm's after-tax cost of capital is 12 percent. The estimated conditional after-tax cash inflows (ATCI) and probabilities are given below. Year 1 $45000 $65000 $90000 Probability 40% 25% 35% Initial Investment $125,000