Rao Roofing of Stillwater, Oklahoma, is also considering the acquisition of Simpkins Storage Company. Rao's management team has analyzed the annual cash flows for Simpkins and come up with these estimates for the three states of the economy:

A rival firm, Mitchell Storage Company is also considering a bid for Simpkins and their estimated cash flow for Simpkins in each potential state of the economy are the same as those of Rao. However, Mitchell's management is much more optimistic about the economy. They estimate the probability of a recession next year at only 20 percent, the probability of a normal state of the economy at 50 percent, and the probability of expansion at 30 percent.
a. Based on Rao's estimated probabilities for each state of the economy, what should be their estimate of expected cash flows for Simpkins?
b. What should be Mitchell's estimate of the expected cash flow for Simpkins' year one cash flow?
c. Which company do you think will ultimately be willing to pay the highest price for Simpkins, all else being equal other than their outlook for the economy?

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Scenario Recession 25% $(50,000) Scenario 11 Normal 55% $150,000 Scenario III Expansion 20% $250,000 Cash flow for each scenario