The ABC Company has gathered the following information about the cash flows associated with a capital budgeting opportunity. The project will cost $10,000,000 to implement,
The ABC Company has gathered the following information about the cash flows associated with a capital budgeting opportunity. The project will cost $10,000,000 to implement, and has a three year estimated economic life.
There is a 50% probability that the economy will be average during the first year of the project, a 30% chance it will be better than average and a 20% chance it will be worse that average. If the economy is average for the first year, there is a 60% chance it will be average in year 2, a 30% chance it will be better than average and a 10% chance it will be below average. If the economy is above average during year 1, there is a 50% chance it will be above average during year 2, a 30% chance it will be average and a 20% chance it will be worse than average. If the economy is below average during the first year, there is a 40% chance it will be below average the second year, a 40% chance it will be average, and a 20% chance it will be better than average.
If the economy is average for year 2, there is a 65% chance it will be average in year 3, a 30% chance it will be better than average and a 5% chance it will be below average. If the economy is above average during year 2, there is a 60% chance it will be above average during year 3, a 30% chance it will be average and a 10% chance it will be worse than average. If the economy is below average during the second year, there is a 50% chance it will be below average the third year, a 40% chance it will be average and a 10% chance it will be better than average.
If the economy is average during a year, the net cash flow for the year will be $4,000,000. If the economy is better than average during a year, the net cash flow for the year will be $5,200,000 and if the economy during a year is worse than average, the net cash flow for the year will be $3,100,000.
What are the annual net cash flows that should be used to evaluate the opportunity?
What is the internal rate of return for the proposal?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get step-by-step solutions from verified subject matter experts
100% Satisfaction Guaranteed-or Get a Refund!
Step: 2 Unlock detailed examples and clear explanations to master concepts
Step: 3 Unlock to practice, ask and learn with real-world examples
See step-by-step solutions with expert insights and AI powered tools for academic success
-
Access 30 Million+ textbook solutions.
-
Ask unlimited questions from AI Tutors.
-
Order free textbooks.
-
100% Satisfaction Guaranteed-or Get a Refund!
Claim Your Hoodie Now!
Study Smart with AI Flashcards
Access a vast library of flashcards, create your own, and experience a game-changing transformation in how you learn and retain knowledge
Explore Flashcards
