Question
(Related to Checkpoint 13.1) (Forecasting cash flows using the expected value) Koch Transportation is contemplating the acquisition of LH Transport, a competing trucking firm.
(Related to Checkpoint 13.1) (Forecasting cash flows using the expected value) Koch Transportation is contemplating the acquisition of LH Transport, a competing trucking firm. Koch's CFO estimates that during the next year LH Transport's cash flows from the acquisition will vary depending on the state of the local economy: a. Calculate the expected cash flow for next year using the estimates provided above. b. Assume the probability of a recession increases to 34 percent, the normal scenario probability remains at 54 percent, and the expansion probability drops to only 12 percent. What is your estimate of the expected cash flow for next year under these circumstances? c. Your analysis of the acquisition suggests that for the investment to have at least a zero NPV, it must produce an annual expected cash flow of $93,840 per year over the next five years. Assuming that the cash flow you estimated in part a is the expected cash flow for Years one through five, what would you like to know about the project cash flows to make you more comfortable with the idea that you can indeed generate the requisite $93,840 per year cash flow? (No computations required.) Data table Probability Cash flow Scenario I: Recession Scenario II: Normal Scenario III: Expanding 26% 54% 20% $(48,000) $148,000 $252,000 (Click on the icon in order to copy its contents into a spreadsheet.) Print Done
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