Heywood Diagnostic Enterprises is evaluating a project with the following net ca
ID: 2702031 • Letter: H
Question
Heywood Diagnostic Enterprises is evaluating a project with the following net cash flows and
probabilities:
Year Prob=0.2 Prob=0.6 Prob=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 $30,000 $40,000 $50,000
e. Assume that Heywood's managers judge the project to have higher-than-average risk. Furthermore, the
company's policy is to adjust the corporate cost of capital up or down by 3 percentage points to account
for differential risk. Is the project financially attractive?
Explanation / Answer
Pv in B= 20k[1-(1.1)^-5] /0.1 +10k/(1.1)^-5
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=200k(0.379)+6.21k=75100+6210=82010
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Pv in B
=113700+6210=119910
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Pv in C
==157810
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EXPECTED PV = 0.2A+.6B+0.2C= 119910
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EXPECTED NPV = 119910-100 000=19910
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VARIANCE =574564000
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STANADRAD DEVIATION =SQUARE ROOT OF 574564000 =23 970