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6. For the following project, the chief financial officer has prepared a set of certainty-equivalent factors to adjust the cash flows for the estimated risk. The economics department has also prepared a set of risk-adjusted interest rates at which to discount the project's cash flow. The project's initial investment is $150,000 and the Treasury security rate is 8%. a. What is the NPV of the project from the finance department's estimates? b. What is the NPV from the economics department's estimates? c. What would you advise the company to do? 42 CHAPTER 5 Risk Analysis in Capital Budgeting 8. Teletech Co. wants to use a decision tree in evaluating a venture capital investment in cable TV. The projected investment has a life of three years, and the associated after-tax cash flows ($000) and probabilities are as follows: The initial investment for the firm is $500,000 after tax. The firm uses a cost of capital of 10%. a. Construct a decision tree with the expected NPV of each alternative. b. What is the expected NPV of the best possible outcome? What is its probability? c. What is the expected NPV of the worst possible outcome? What is its probability? d. Should Teletech make the investment? Why or why not? 10. The following exhibit contains Beech's estimates of demand, price, and fixed and variable costs for the Starship under three alternative economic forecasts. -Dollats in millions a. If all other variables are assumed to be at their expected value (normal forecast), how sensitive is the project's NPV to changes in fixed cost? Use a cost of capital of 10%, tax rate of 35%, and project life of 10 years. b. How sensitive is the project's NPV to changes in price? c. How sensitive is the project's NPV to changes in variable cost? d. Which factor seems most important to the success of the plane? c. Is the Starship a risky project? Explain