Question

Orange Valley Recycling owns a(n) ice cream parlor. The objective of its managers is to maximize shareholder value. The firm is evaluating the car wash project. Which assertion is true, based on the information given in the question and the following table on the project?

Base-case NPV (based on final estimates and expectations)	180,000 dollars
Value created if the weather is unusually cold (based on scenario analysis)	-2,090,000 dollars
Value created if worst-case revenues occur (based on sensitivity analysis)	-2,270,000 dollars
Value created if best-case taxes occur (based on sensitivity analysis)	224,000 dollars
Probability that project will create more than $0 of value (based on simulation analysis)	12.5 percent

		Orange Valley Recycling should reject the car wash project
		It is not clear whether Orange Valley Recycling should accept or reject the car wash project, because the information provided is contradictory with respect to answering the question
		Orange Valley Recycling should accept the car wash project
		It is not clear whether Orange Valley Recycling should accept or reject the car wash project, because the cost of capital for the project is not given
		Orange Valley Recycling should be indifferent between accepting and rejecting the car wash project

Answer 1

Answer :

Option B

Explanation :

Calculating Estimated NPV

Estimated NPV= Best Case NPV × Probability of Best Case Scenario
+ Base Case NPV × Probability of Base Case Scenario
+ Worst Case NPV × Probability of Worst Case Scenario

Given that the information regarding the probabilities of the base case, best case and the worst scenario is not given individually, doing a Scenario Analysis to calculate the Estimated NPV of a project is not possible for the given question.

We are only given the 'probability that the project will create more than $0 of value ' which isn't sufficient to accept or reject the project.