FIN 534 Homework Set #4
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FIN 534 Homework Set #4
Use the following information for Questions 6 through 8:
The staff of Porter Manufacturing has estimated the follo
wing net after
–
tax cash flows and probabilities for
a new manufacturing process:
Line 0 gives the cost of the process, Lines 1 through 5 give operating cash flows, and Line 5* contains the
estimated salvage values. Porter’s cost of capital for an average
–
r
isk project is 10%.
Net After
–
Tax Cash Flows
Year
P = 0.2
P = 0.6
P = 0.2
0
−$100,000
−$100,000
−$100,000
1
20,000
30,000
40,000
2
20,000
30,000
40,000
3
20,000
30,000
40,000
4
20,000
30,000
40,000
5
20,000
30,000
40,00
0
5*
0
20,000
30,000
6.
Assume that the project has average risk. Find the project’s expected NPV. (Hint: Use expected
values for the net cash flow in each year.)
7.
Find the best
–
case and worst
–
case NPVs. What is the probability of occurr
ence of the worst case
if the cash flows are perfectly dependent (perfectly positively correlated) over time?
8.
Assume that all the cash flows are perfectly positively correlated. That is, assume there a
re only
three possible cash flow streams over time
—
the worst case, the most likely (or base) case, and
the best case
—
with respective probabilities of 0.2, 0.6, and 0.2. These cases are represented by
each of the columns in the table. Find the expected NPV,
its standard deviation, and its
coefficient of variation
for each probability
.
Use the following information for Ques
tion 9:
At year
–
end 2013, Wallace Landscaping’s total assets were $2.17 million and its accounts payable were
$560,000. Sales, which in 2013 were $3.5 million, are expected to increase by 35% in 2014. Total...