The staff of Porter Manufacturing has estimated the following net after -tax cas
ID: 2716881 • Letter: T
Question
The staff of Porter Manufacturing has estimated the following net after
-tax cash flows and probabilities for a new manufacturing process:
Line 0 gives the cost of the process, Lines 1 through 5 give operating cash flows, and Line 5* contains the estimated salvage values. Porter’s cost of capital for an average
-risk project is 10%.
Net After- Tax Cash Flows
Year P = 0.2 P = 0.6 P = 0.2
0 $100,000 $100,000 $100,000
1 20,000 30,000 40,000
2 20,000 30,000 40,000
3 20,000 30,000 40,000
4 20,000 30,
000 40,000
5 20,000 30,000 40,000
5* 0 20,000 30,000
Assume that the project has average risk. Find the projects expected NPV. (Hint: Use expected values for the net cash flow in each year
Year P = 0.2 P = 0.6 P = 0.2
0 $100,000 $100,000 $100,000
1 20,000 30,000 40,000
2 20,000 30,000 40,000
3 20,000 30,000 40,000
4 20,000 30,
000 40,000
5 20,000 30,000 40,000
5* 0 20,000 30,000
Explanation / Answer
5 year total cash flow = 5 yr cash flow + salvage value
0.2 0.6 0.2 Year P = 0.2 P = 0.6 P = 0.2 expected value 0 -100000 -100000 -100000 -100000 1 20000 30000 40000 30000 2 20000 30000 40000 30000 3 20000 30000 40000 30000 4 40000 30000 40000 34000 5 20000 30000 40000 30000 5* 0 20000 30000 18000Related Questions
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