FIN534 Homework Set 4

Use the following information for Question 4:

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

4.Assume that the project has average risk. Find the project’s expected NPV. (Hint: Use expected values for the net cash flow in each year.)

Field of study: 
Finance
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