Evaluation of investment
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This is a summary of the cash flows
Time Period Annual Cash Flow (after taxes)
0 -$1,600,000
1 600,000
2 600,000
3 400,000
4 400,000
Additional information
? My company uses NPV to evaluate all investments.
? Required return on this investment is 10% per year.
? There are actually two possible scenarios for the annual cash flows in years 1-4. Each scenario has a 50% probability associated with it.
? Scenario One, annual cash flows would be $200,000 for years 1 and 2, and $0 for years 3 and 4.
? Scenario two, annual cash flows would be $1,000,000 for years 1 and 2, and $800,000 for years 3 and 4. The group presenting this project calculated the weighted average cash flows for each year in developing the numbers in the table above.
? If the project is unsuccessful, the company will have the opportunity to liquidate their investment for ½ its original amount at the end of year two. There is no liquidation value at the end of year 4.
? Based on the values in the table above, members of the committee have calculated a NPV of -$130,000. They are talking about rejecting the project. I, however, wonder if this is correct. What alterations, if any, should I recommend in the analysis thus far? Explain.
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Solution Summary
Excel file contains calculation of NPV under uncertainty
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