Refer to the XYZ Company example in the chapter and the results in Panels A and B of Exhibit 12.7. On the basis of this information, management of the company has decided to delay the implementation of the project for 1 year. Those managers are now interested in knowing how sensitive this decision is with respect to the assumptions theyve made regarding the basic analysis. Therefore, they have asked you to prepare some supplementary analyses regarding Panel B of Exhibit 12.7.

Required:

1. Holding everything else constant, what is the expected NPV of the decision if the probabilities for the three scenarios are as follows: high (21%), medium (61%), and low (18%)?

2. Holding everything else constant, what is the expected NPV of the decision if the probabilities for the three scenarios are as follows: high (54%), medium (28%), and low (18%)?

3. Prepare a 5 3 table containing the estimated NPV of the decision to delay for each combination of the following: risk-free rate of interest (9%, 10%, 11%) and weighted-average cost of capital (12%, 13%, 14%, 15%, and 16%). For example, one cell in your table would be the estimated NPV of the project if the risk-free rate of interest is 9% and the weighted-average cost of capital is 12%.

1. Holding everything else constant, what is the expected NPV of the decision if the probabilities for the three scenarios are as follows: high (21%), medium (61%), and low (18%)? (Enter your answers in millions. Do not round intermediate calculations. Round your final answers to 3 decimal places.)

Scenario NPV (@t=0)

High 10.92

Medium 3.02

Low 0.05

Total

#2 Holding everything else constant, what is the expected NPV of the decision if the probabilities for the three scenarios are as follows: high (54%), medium (28%), and low (18%)? (Enter your answers in millions. Do not round intermediate calculations. Round your final answers to 3 decimal places.)

Scenario NPV (@t=0)

High 10.92

Medium 3.02

Low 0.05

Total

#3 Prepare a 5 3 table containing the estimated NPV of the decision to delay for each combination of the following: risk-free rate of interest (9%, 10%, 11%) and weighted-average cost of capital (12%, 13%, 14%, 15%, and 16%). For example, one cell in your table would be the estimated NPV of the project if the risk-free rate of interest is 9% and the weighted-average cost of capital is 12%. (Enter your answers in millions. Do not round intermediate calculations. Round your final answers to 2 decimal places.)

Risk-Free Rate

9% 10% 11%

WACC 12%

WACC 13%

WACC 14%

WACC 15%

WACC 16%