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 (60%), and low (19%)?

2. Holding everything else constant, what is the expected NPV of the decision if the probabilities for the three scenarios are as follows: high (52%), medium (29%), and low (19%)?

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 (8%, 9%, 10%) and weighted-average cost of capital (11%, 12%, 13%, 14%, and 15%). For example, one cell in your table would be the estimated NPV of the project if the risk-free rate of interest is 8% and the weighted-average cost of capital is 11%.

I correctly answered question 3 but I am struggling with 1 and 2. Please help.

Below is Exhibit 12.7

\begin{tabular}{|c|c|c|c|c|c|c|c|c|c|c|c|} \hline & A & B & C & D & E & F & G & H & I & J & K \\ \hline 1 & \multicolumn{10}{|c|}{ Panel A: Expected NPV--Invest in Project Today (time 0); amounts in $ millions } & \\ \hline \multicolumn{12}{|l|}{2} \\ \hline 3 & Discount rate (WACC)= & 15.00% & & & & & & s. & & & \\ \hline \multicolumn{11}{|l|}{4} & \\ \hline 5 & Cash Outflow & Market Demand & & \multicolumn{3}{|c|}{ End-of- Period Cash Inflows } & NPV of & Weighted & & & \\ \hline 6 & (@ time 0 & (Scenario) & Probability & 1 & 2 & 3 & Scenario & NPV & & & \\ \hline 7 & & High & 0.25 & $70 & $70 & $70 & $59.826 & $14.956 & & & \\ \hline 8 & - & Medium & 0.50 & $50 & $50 & $50 & $14.161 & $7.081 & & & \\ \hline 8 & & Low & 0.25 & $5 & $5 & $5 & $(88.584) & $(22.146) & & & \\ \hline 10 & & & 1.00 & & & \multicolumn{2}{|c|}{ Expected NPV = } & $(0.109) & & & \\ \hline \multicolumn{12}{|l|}{11} \\ \hline 12 & \multicolumn{11}{|c|}{ Panel B: Expected NPV-- Delay Investment by One Year, Only if NPV is Increased; amounts in \$ millions - } \\ \hline 13 & \\ \hline 14 & Discount rate (WACC)= & 15.00% & & & & & & & & & \\ \hline 15 & Risk-free rate = & 5.00% & & & & & & & & & \\ \hline 16 & Cash outflow in one year = & $100 & & : & & & & & - & & \\ \hline \multicolumn{12}{|l|}{17} \\ \hline 18 & & Market Demand & & \multicolumn{4}{|c|}{ End-of-Period Cash Inflows } & PV of Cash & PV of Cash & Weighted & \\ \hline 19 & & (Scenario) & Probability & 1 & 2 & 3 & 4 & Outflows & Inflows & NPV@ time 0 & \\ \hline 20 & & High & 0.25 & $(100) & $70 & $70 & $70 & $(95.238) & $138.979 & $10.935 & \\ \hline 21 & & Medium & 0.50 & $(100) & $50 & $50 & $50 & $(95.238) & $99.271 & $2.016 & \\ \hline 22 & & Low & 0.25 & $0 & $0 & $0 & $0 & $0.000 & $0.000 & $0.000 & \\ \hline 23 & & & 1.00 & & & & & \multicolumn{2}{|c|}{ Expected NPV =} & $12.951 & \\ \hline 24 & \multicolumn{11}{|c|}{ discounted at risk- free rate of interest } \\ \hline 25 & \multicolumn{11}{|c|}{ discounted at WACC (weighted-average cost of capital); formula for cell I20: =PV(B14,1,(PV(B14,3,E20))) } \\ \hline 26 & \multicolumn{11}{|c|}{ formula for cell J20:=(I20+H20)C20} \\ \hline \end{tabular}