1. Ms. Lee Ding is considering whether the following capitol project should be u
ID: 1207670 • Letter: 1
Question
1. Ms. Lee Ding is considering whether the following capitol project should be undertaken. Its life is 6 years; it has a 6% salvage value; and her firm uses a 12% MARR.
Initial Cost P* Annual Net Revenue P*
$250,000 0.4 $ 75,000 0.2
300,000 80,000
350,000 0.2 90,000 0.2
400,000 .05 100,000 0.1
500,000 .05 115,000 0.1
*Probability
a) What is the probability of it costing $300,000?
b) What is the probability of the net revenue being $80,000?
c) What is the expected value of the project?
d) Should she do it?
Explanation / Answer
(a) Probability = 1 - (0.4 + 0.2 + 0.05 + 0.05) = 1 - 0.7 = 0.3
(b) Probability = 1 - (0.2 + 0.2 + 0.1 + 0.1) = 1 - 0.6 = 0.4
(c)
Expected net revenue ($) = 75,000 x 0.2 + 80,000 x 0.4 + 90,000 x 0.2 + 100,000 x 0.1 + 115,000 x 0.1
= 15,000 + 32,000 + 18,000 + 10,000 + 11,500
= 86,500
Expected cost ($) = 250,000 x 0.4 + 300,000 x 0.3 + 350,000 x 0.2 + 400,000 x 0.05 + 500,000 x 0.05
= 100,000 + 90,000 + 70,000 + 20,000 + 25,000
= 305,000
Expected salvage value = Expected first cost x 6% = $305,000 x 6% = $18,300
Expected NPV ($) = - 305,000 + 86,500 x PVIFA(12%, 6) + 18,300 x PVIF(12%, 6)
= - 305,000 + 86,500 x 4.1114 + 18,3000 x 0.5066 = - 305,000 + 355,636 + 9,271
= 59,907
(d) Since expected NPV is positive, she should do it.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.