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Bradford Services Inc. (BSI) is considering a project that has a cost of $10 million and...

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.

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?
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