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Pliza limited is considering investing KSh. 30 million on a two year project in the development of a new product. The cash flows expected to be generated by the product for the two years will depend on the level of demand which can either be high or low. The following information relates to the expected cash flows: i. It is estimated that there is a 60% probability of high demand in the first year with a resulting cash flow of KSh. 27 million. In the second year Cash flows would increase to KSh. 32 million. If demand is still high with a probability of 55%, otherwise they would reduce to KSh. 18 million if is low. ii. If the demand in the first year is low then the cash flow would be expected to be KSh. 5 million, however in the second year the cash flows would increase to KSh. 15 million if the demand is high with a probability of 30%. If the demand is still low in the second year then the cash flows would remain at KSh. 5 million. Plaza Limited's cost of capital is 12 % per annum. Using suitable calculations, advice the company on whether to invest in the project. (8 marks) Determine the probability that the project's net present value (NPV) will be positive. (1 marks) Pliza limited is considering investing KSh. 30 million on a two year project in the development of a new product. The cash flows expected to be generated by the product for the two years will depend on the level of demand which can either be high or low. The following information relates to the expected cash flows: i. It is estimated that there is a 60% probability of high demand in the first year with a resulting cash flow of KSh. 27 million. In the second year Cash flows would increase to KSh. 32 million. If demand is still high with a probability of 55%, otherwise they would reduce to KSh. 18 million if is low. ii. If the demand in the first year is low then the cash flow would be expected to be KSh. 5 million, however in the second year the cash flows would increase to KSh. 15 million if the demand is high with a probability of 30%. If the demand is still low in the second year then the cash flows would remain at KSh. 5 million. Plaza Limited's cost of capital is 12 % per annum. Using suitable calculations, advice the company on whether to invest in the project. (8 marks) Determine the probability that the project's net present value (NPV) will be positive. (1 marks)
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Related Book For
Intermediate Accounting
ISBN: 978-0324592375
17th Edition
Authors: James D. Stice, Earl K. Stice, Fred Skousen
Posted Date:
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