A corporation is assessing the risk of two capital budgeting proposals. The financial analysts have developed pessimistic,
Question:
A corporation is assessing the risk of two capital budgeting proposals. The financial analysts have developed pessimistic, most likely, and optimistic estimates of the annual cash inflows which are given in the following table. The firm’s cost of capital is 10 percent.
Project A
Initial Investment
$20,000
Annual Cash Inflow; Outcome
$5,000; Pessimistic
10,000; Most likely
15,000; Optimistic
Project B
Initial Investment
$100,000
Annual Cash Inflow; Outcome
$20,000; Pessimistic
40,000; Most likely
100,000; Optimistic
Questions:
The expected net present value of project A if the outcomes are equally probable and the project has five-year life is
A) -1045
B) 17910
C) 36865
D) 93730
College Mathematics for Business Economics Life Sciences and Social Sciences
ISBN: 978-0321614001
12th edition
Authors: Raymond A. Barnett, Michael R. Ziegler, Karl E. Byleen