fm13 14 - Cost Of Capital = 10% PV Of Expected CFs = $74.61...

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Mini Case: 13 - 14 c. Tropical Sweets is considering a project that will cost $70 million and will generate expected cash flows of $30 per year for three years. The cost of capital for this type of project is 10 percent and the risk-free rate is 6 percent. After discussions with the marketing department, you learn that there is a 30 percent chance of high demand, with future cash flows of $45 million per year. There is a 40 percent chance of average demand, with cash flows of $30 million per year. If demand is low (a 30 percent chance), cash flows will be only $15 million per year. What is the expected NPV? Answer: Initial Cost = $70 Million Expected Cash Flows = $30 Million Per Year For Three Years
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Unformatted text preview: Cost Of Capital = 10% PV Of Expected CFs = $74.61 Million Expected NPV = $74.61 - $70 = $4.61 Million Alternatively, one could calculate the NPV of each scenario: Demand Probability Annual Cash Flow High 30% $45 Average 40% $30 Low 30% $15 Find NPV of each scenario: PV High: N=3 I=10 PV=? PMT=-45 FV=0 PV= 111.91 NPV High = $111.91 - $70 = $41.91 Million. PV Average: N=3 I=10 PV=? PMT=-30 FV=0 PV= 74.61 NPV Average = $74.61 - $70 = $4.71 Million. PV Low: N=3 I=10 PV=? PMT=-15 FV=0 PV= 37.30 NPV Low = $37.30 - $70 = -$32.70 Million. Find Expected NPV: E(NPV)=.3($41.91)+.4($4.61)+.3(-$32.70) E(PV)= $4.61....
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This note was uploaded on 07/13/2011 for the course FIN 4414 taught by Professor Staff during the Spring '08 term at University of Florida.

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