- Submitted By: BettyTurner
- Date Submitted: 07/13/2015 12:36 AM
- Category: Book Reports
- Words: 4050
- Page: 17

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...

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