Question
The firms capital budgeting manager suggests that the firm do a scenario analysis for this project because of the sensitivities of both the equipments cost
The firms capital budgeting manager suggests that the firm do a scenario analysis for this project because of the sensitivities of both the equipments cost savings and its salvage value. After an extensive analysis he comes up with the following probabilities and values for the scenario analysis: SCENARIO PROBABILITY BEFORE TAX COST SAVING PER ANNUM (sh000) SALVAGE VALUE (sh000) 1 0.10 15,000 10,000 2 0.20 20,000 5,000 3 0.25 25,000 8,000 4 0.15 10,000 5,000 5 0.20 30,000 12,000 6 0.10 40,000 14,000 2 Additional information: I. The firm depreciates all its fixed assets on a straight line basis II. The cost of capital is 10% III. Corporation tax rate applicable is 30 %. Required: Determine the probability that the projects net present value will be at least sh.10 Million (Assume normal distribution)
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