Q # 4 Risk Management in Capital Budgeting

AL-Rahim Company is evaluating a new saw with a life of two years. The saw costs Rs4000 and future after tax cash flows depend on demand for the companys products. The illustration of probability tree of possible future cash flows associated with the new saw is as follows:

Year 1 Year 2

Initial Probability Net Cash Flows Conditional Probability Net Cash Flows Branch

.3 Rs1000 1

.4 Rs1300 .4 Rs1200 2 .3 Rs1800 3

.4 Rs2000 4

.6 Rs1800 .4 Rs2500 5 1 .2 Rs3000 6 Required:

1. What are the joint probabilities of occurrence of the various branches?

2. If the risk free rate is 9 %, the net present value of each of the 6 branches

3. Expected value and standard deviation of the probability distribution of possible net present values.

Q # 4 Risk Management in Capital Budgeting AL-Rahim Company is evaluating a new saw with a life of two years. The saw costs Rs 4000 and future after tax cash flows depend on demand for the company's products. The illustration of probability tree of possible future cash flows associated with the new saw is as follows: Year 1 Year 2 Initial Probability Net Cash Flows Conditional Probability Net Cash Flows Branch Rs 1000 Rs 1.300 R$1200 2 Rs 1800 3 Rs1800 2/3 Rs 2000 Rs 2500 5 .2 Rs3000 Required: 1. What are the joint probabilities of occurrence of the various branches? 2. If the risk free rate is 9 %, the net present value of each of the 6 branches 3. Expected value and standard deviation of the probability distribution of possible net present values