Consider a project with an initial cost of $1,000 in Year 0, in which 3 scenarios can occur, with the probabilities and cash flows (CF) as shown in the table. The appropriate cost of capital is 11.5%.
|
Scenario
|
Probability
|
Year 1
|
Year 2
|
Year 3
|
|
High
|
30%
|
800
|
800
|
800
|
|
Average
|
40%
|
500
|
500
|
500
|
|
Low
|
30%
|
-200
|
-200
|
-200
|
a. Find the NPVs for each of the 3 scenarios (to dollars and cents).
b. Find the expected NPV for the entire project (to dollars and cents).
c. Would you go ahead with this project? Explain your answer.
d. If there is a delay in beginning the project until Year 1, and the Low third scenario (with CFs of negative $200) is not undertaken in Year 1, what is the expected NPV of the modified project (to dollars and cents)?
e. Would you undertake the modified project? Provide your rationale.