PROBLEM 9-10 INDEPENDENT CASH FLOW AND CAPITAL BUDGETING UNDER UNCERTAINTIES Rec Cable Corporation has determined the following discrete probability distributions for the net 1. cash flow generated by a contemplated project. 2. Period 1 TO Period 2 Period 3 3. Probability Cash Flow Probability Cash Flow Probability Cash Flow 0.10 4,000 0.10 3,000 0.10 2,000 0.25 OBLE 5,000 0.25 4,000 0.25 3,000 0.30 6,000 0.30 5,000 0.30 4,000 T 0.25 7,000 0.25 6,000 0.25 5,000 i. 0.10 8,000 0.10 7,000 0.10 6,000 1 Required 1. Assume the probability distributions of cash flow for future periods are independent. Also assume that the after-tax, risk-free rate is 4 percent. If the project requires an initial outlay Rs. 10,000, determine the expected value of the net-present value. 2. Determine the standard deviation about the expected value. 3. What is the probability that the project will have a net present value of (a) greater than zero, (b) less than zero; (c) more than Rs. 4,000. Ans: (1) Rs. 3,948; (2) Rs. 1827.72 (3) (a) 98.46% (b) 1.54% (c) 48.80% PROBLEM 9-10 INDEPENDENT CASH FLOW AND CAPITAL BUDGETING UNDER UNCERTAINTIES Rec Cable Corporation has determined the following discrete probability distributions for the net 1. cash flow generated by a contemplated project. 2. Period 1 TO Period 2 Period 3 3. Probability Cash Flow Probability Cash Flow Probability Cash Flow 0.10 4,000 0.10 3,000 0.10 2,000 0.25 OBLE 5,000 0.25 4,000 0.25 3,000 0.30 6,000 0.30 5,000 0.30 4,000 T 0.25 7,000 0.25 6,000 0.25 5,000 i. 0.10 8,000 0.10 7,000 0.10 6,000 1 Required 1. Assume the probability distributions of cash flow for future periods are independent. Also assume that the after-tax, risk-free rate is 4 percent. If the project requires an initial outlay Rs. 10,000, determine the expected value of the net-present value. 2. Determine the standard deviation about the expected value. 3. What is the probability that the project will have a net present value of (a) greater than zero, (b) less than zero; (c) more than Rs. 4,000. Ans: (1) Rs. 3,948; (2) Rs. 1827.72 (3) (a) 98.46% (b) 1.54% (c) 48.80%