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Cash Flow and Evaluation of Risk

Possible outcomes for three investment alternatives and their probabilities of occurrence are given below.

Alternative 1

Outcomes Probability

Failure 50 .2
Acceptable 80 .4
Successful 120 .4

Alternative 2

Outcomes Probalbilty

Failure 90 .3
Acceptable 160 .5
Successful 200 .2

Alternative 3

Outcomes Probalbilty

Failure 80 .4
Acceptable 200 .5
Successful 400 .1

Rank the three alternatives in term of risk ( compute the coefficient of variation)

Assume a corporation has earnings before depreciation and taxes of # of $90,000, depreciation of $40,000, and that it is ina a 30% it is in a
30 per cent tax bracket. Compute its cash flow using the formula below:

Earnings before depreciation and Taxes (EBDIT) $90,000

Depreciation $40,000

Earnings before taxes $130,000

Taxes @ 30%

Earnings after taxes

Depreciation

Cash Flow

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Cash Flow and Evaluation of Risk are investigated. The solution is detailed and well presented.

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