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FIN - Heywood Diagnostic Enterprises




Question;Heywood Diagnostic Enterprises is evaluating a project with the following net cash flows andprobabilities:Year Prob=0.2 Prob=0.6 Prob=0.20 -$100,000 -$100,000 -$100,0001 $20,000 $30,000 $40,0002 $20,000 $30,000 $40,0003 $20,000 $30,000 $40,0004 $20,000 $30,000 $40,0005 $30,000 $40,000 $50,000The Year 5 values include salvage value. Heywood's corporate cost of capital is 10 percent.a. What is the project's expected (i.e., base case) NPV assuming average risk? (Hint: The base case netcash flows are the expected cash flows in each year.)b. What are the project's most likely, worst, and best case NPVs?c. What is the project's expected NPV on the basis of the scenario analysis?d. What is the project's standard deviation of NPV?e. Assume that Heywood's managers judge the project to have higher-than-average risk. Furthermore, thecompany's policy is to adjust the corporate cost of capital up or down by 3 percentage points to accountfor differential risk. Is the project financially attractive?


Paper#50556 | Written in 18-Jul-2015

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