You have been asked to evaluate the acquisition of a new earthmover. The movers basic price

is sh.50 million and it costs 10 million to modify it for special use by the company. The mover is

expected to have a useful life of 3 years and scrap value of sh.20 million after 3 years. This

investment will require an increase in net operating working capital of sh 2 million at the

beginning of its useful life.

The earthmovers purchase will not affect revenues but it is expected to save the company sh.20

million per year in before tax operating costs mainly labor.

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 '000'	SALVAGE VALUE
1	0.10	15,000.00	10,000.00
2	0.20	20,000.00	5,000.00
3	0.25	25,000.00	8,000.00
4	0.15	10,000.00	5,000.00
5	0.20	30,000.00	12,000.00
6	0.10	40,000.00	14,000.00

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