Creato is a technology manufacturer. It is planning to launch a new product it has developed....

 

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Creato is a technology manufacturer. It is planning to launch a new product it has developed. Due to rapid changes in consumer tastes in this market it is expected that two years after launch the product would be obsolete and sales would fall to zero. The initial net investment required (including working capital investment) would be €3,500,000, which would be incurred immediately if the project proceeds. €600,000 of the working capital investment will be recovered at the end of the two-year period. Creato's WACC is estimated at 11%. Based on an analysis of past product launches Creato has forecast net cash flows from selling the product. If there is high customer demand in the first year, net cash flows of €7,100,000 are expected, if demand is low, net cash flows of €300,000 are expected. The probability of high demand is 0.30, the probability of low demand is 0.70 If there is high demand in the first year, three outcomes are possible in the second year: high demand (net cash flows of €10,000,000 - probability of 0.25), moderate demand (net cash flows of €4,250,000 - probability of 0.50) or low demand (net cash flows of €200,000-probability of 0.25). If there is low demand in the first year, three outcomes are possible in the second year: high demand (net cash flows of €2,500,000 - probability of 0.25), moderate demand (net cash flows of €500,000 - probability of 0.50) or zero demand (net cash flows of - €150,000-probability of 0.25). Note: All cash-flows are after-tax. Round figures to the nearest thousand in your analysis (11 Estimate the Expected NPV and standard deviation for the proposed investment Briefly comment on the use of mean-variance analysis in the context of project finance Creato is a technology manufacturer. It is planning to launch a new product it has developed. Due to rapid changes in consumer tastes in this market it is expected that two years after launch the product would be obsolete and sales would fall to zero. The initial net investment required (including working capital investment) would be €3,500,000, which would be incurred immediately if the project proceeds. €600,000 of the working capital investment will be recovered at the end of the two-year period. Creato's WACC is estimated at 11%. Based on an analysis of past product launches Creato has forecast net cash flows from selling the product. If there is high customer demand in the first year, net cash flows of €7,100,000 are expected, if demand is low, net cash flows of €300,000 are expected. The probability of high demand is 0.30, the probability of low demand is 0.70 If there is high demand in the first year, three outcomes are possible in the second year: high demand (net cash flows of €10,000,000 - probability of 0.25), moderate demand (net cash flows of €4,250,000 - probability of 0.50) or low demand (net cash flows of €200,000-probability of 0.25). If there is low demand in the first year, three outcomes are possible in the second year: high demand (net cash flows of €2,500,000 - probability of 0.25), moderate demand (net cash flows of €500,000 - probability of 0.50) or zero demand (net cash flows of - €150,000-probability of 0.25). Note: All cash-flows are after-tax. Round figures to the nearest thousand in your analysis (11 Estimate the Expected NPV and standard deviation for the proposed investment Briefly comment on the use of mean-variance analysis in the context of project finance

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Estimating Expected NPV and Standard Deviation for Creatos Project Step 1 Calculate expected cash fl... View the full answer