Heywood Diagnostic Enterprises is evaluating a project with the following net cash flows and probabilities:
Year----Prob= .2---Prob= .6------Prob= .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-------30,000---------40,000------50,000
The year 5 values include salvage value. Heywood's corporate cost of capital is 10 percent.
a. What is the projects expected (i.e., base case) NPV assuming average risk? (Hint: The base case net cash flows are the expected cash flows in each year.)
b. What are the projects mostly likely worst and the best case NPV's?
c. What is the projects expected NPV on the basis of the scenario analysis?
d. What is the projects standard deviation of NPV?
e. Assume that Heywoods managers judge the project to have lower than average risk. Futhermore the companys policy is to adjust the corporate cost of capital up or down by 3 percent points to account for differential risk. Is the project financially attractive?