Forecasting cash flows using the expected value) Rao Roofing of Stillwater, Oklahoma, is 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 shown here:

Scenario I: Recession Scenario II: Normal Scenario III: Expansion Probability 15% 60% 25% Cash flow for each scenario $(52,000) $149,000 $247,000

. A rival firm, Michell Storage Company is also considering a bid for Simpkins and their estimated cash flow for Simpkins in each potential state of theb 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 10 percent, the probability of a normal state of the economy at 55 percent, and the probability of expansion at 35 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?

Based on Rao's estimated probabilities for each state of the economy, their estimate of the expected cash flow for Simpkin should be

(Round to the nearest dollar.)

Part 2

b. Mitchell's estimate of the expected cash flow for Simpkins' year one cash flow should be

(Round to the nearest dollar.)

Part 3

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? (Select the best choice below.)

A.

Mitchell's forecast cash flow will deter the company from acquiring the new business.

B.

Mitchell's forecast cash flow will have no influence whatsoever in the decision.

C.

Mitchell's optimistic view of the future state of the economy creates a higher forecasted cash flow and might lead to a willingness to pay more for the acquisition.

D.

Mitchell's forecast cash flow will make the managers second-guess themselves.