ONLY ANSWER THIS QUESTION IF YOU ARE CERTAIN THAT YOU CAN SOLVE ALL THE QUESTIONS(1,2,3,4)

A bottle company ALPHA, is considering creating a new bottle of 0.25 lt. To decide whether to invest in this project or not, they performed market research that costed 5,000. The results indicated two possible scenarios that depend on the competitors reaction to create a similar product and on the percentage of the faithful customers of ALPHA. Scenario A has a 45% chance to be realized, while scenario B has a probability of 55%. For the projects realization the company must purchase special machinery that cost 80,000, while transportation and installation costs amount to 2,000. The useful life of the project is two years, and the machinery can be sold at the end of the useful life for 30,000. Table 1 presents the pertinent economic data. At the end of the second year the working capital is going to be recaptured. The tax rate is 25%, the weighted average cost of capital is 10% and the company fully depreciates fixed assets for tax purposes, using the straight-line depreciation method.

1. Calculate the expected net cash flows for each one of the two years. (10%)

2. Calculate and comment the standard deviations and the coefficient of variations of the NCFs of each year. What do they mean and what do they imply? (10%)

3. Should ALPHA proceed with the new bottle project based on the NPV evaluation approach? (5%)

4. Would the above decision change if they applied the IRR method? When do the two methods give conflicting results? (5%)

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