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Q1)The Seminole Production Company is analyzing th...




Q1)The Seminole Production Company is analyzing the investment in a new line of business machines. The intial outlay required is $35 million. The net cash flows expected from the investment are as follows: YEAR NET CASH FLOW (Millions) 1 $5 2 8 3 15 4 20 5 15 6 10 7 4 The firm's cost of capital (used for projects of average risk)is 15 percent. a)Compute the net present value of this project assuming it processes average risk. b)Because of the risk inherent in this type of investment, Seminole has decided to employ the certainty equivalent approach. After considerable discussion, managment has agreed to apply the following certainty equivalents to the project's cash flows: YEAR Xt 0 1.00 1 0.95 2 0.90 3 0.80 4 0.60 5 0.40 6 0.35 7 0.30 If the risk-free rate is 9 percent, compute the project's certainty equivalent net present value. c) On the basis of the certainty equivalent analysis, should the project be accepted? Q2)Great Basin's managment has arrived at an expected net present value for project A of $1.0 million. The standard deviation of the net present value has been estmated from the simulation model results to be $0.8 million. a) What is the probability that the project will have a negative net present value? b)What is the probability that the project will have a net present value greater than $2.2 million? Q3)You have estimated the expected NPV from a project to be $3 million with a standard deviation of $4 million. The distribution of the possible NPV's is approximately normal. If you are willing to accept a 25 percent chance of incurring a negative NPV on the project, should it be undertaken? Q4)The managment of Greensboro Products has been evaluating the risk of the cash flows associated with the proposed new project. The expected net cash flow for year 1 is $50,000. The most optimistic estimate (not expected to be exceeded more than 10 percent of the time) of the year 1 net cash flows is $110,000, and the most pessimistic net cash flow estimate for year 1 is -$10,000(no greater than 10 percent chance of a value this low or lower). What is the probability that year 1 net cash flows will be negative?


Paper#10163 | Written in 18-Jul-2015

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