Question
Bradford Services Inc. (BSI) is considering a project that has a cost of $10 million and...
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Bradford Services Inc. (BSI) is considering a project that has a cost of $10 million and an expected life of 3 years. There is a 30 percent probability of good conditions, in which case the project will provide a cash flow of $9 million at the end of each year for 3 years. There is a 40 percent probability of medium conditions, in which case the annual cash flows will be $4 million, and there is a 30 percent probability of bad conditions and a cash flow of -$1 million per year. BSI uses a 12 percent cost of capital to evaluate projects like this. |
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Problem 1: Find the project’s expected cashflow and NPV
|
Condition |
Probability |
Cash Flow |
Prob.*Cash Flow |
|
Good |
0.3 |
$9 |
|
|
Medium |
0.4 |
$4 |
|
|
Bad |
0.3 |
-$1 |
|
|
Expected CF |
|
Expected CF = |
|
T=0 |
T=1 |
T=2 |
T=3 |
|
|
CF |
|
NPV of Project = |
|
What can you conclude regarding this project? |
Homework Answers
Answer #1
SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE
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