(Related to Checkpoint 13.1) (Forecasting cash flows using the expected value) Koch Transportation is contemplating the acquisition of LH Transport, a competing trucking firm. Koch's CFO estimates that during the next year LH Transport's cash flows from the acquisition will vary depending on the state of the local economy:

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.

a. Calculate the expected cash flow for next year using the estimates provided above.

b. Assume the probability of a recession increases to

4141

percent, the normal scenario probability remains at

5555

percent, and the expansion probability drops to only

44

percent. What is your estimate of the expected cash flow for next year under these circumstances?

c. Your analysis of the acquisition suggests that for the investment to have at least a zero NPV, it must produce an annual expected cash flow of

$75 comma 00075,000

per year over the next five years. Assuming that the cash flow you estimated in part a is the expected cash flow for Years one through five, what would you like to know about the project cash flows to make you more comfortable with the idea that you can indeed generate the requisite

$75 comma 00075,000

per year cash flow? (No computations required.)

or the new business is

$nothing .

(Round to the nearest dollar.)

2

parts remaining

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Check Answer

Data Table

	Scenario I: Recession	Scenario II: Normal	Scenario III: Expanding
Probability	29%	55%	16%
Cash flow	$( 50 comma 000 )(50,000)	$154 comma 000154,000	$255 comma 000255,000

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