Anonymous asked in Business & FinanceInvesting · 9 years ago

Capital budgeting problem - any help with this?

I need help with the following problem and 2 questions below it. If anyone can help I would appreciate it.

Note that there are three columns (with cash flows), it just formats weird when I put in in yahoo answers.

Jeremy is the owner of a small construction company. He is thinking about purchasing some construction equipment; however, he knows that the economy will have a major impact on his future cash flows. He is not quire sure what to do with the scenario data that his financial officer gave him, and needs advice.

Scenario Analysis

Worst case - Most Likely - Best case

30% Probability - 50% Probability - 20% Probability

Cost of investment(Year 0) $308,000 $308,000 $308,000

Year 1 Net Cash Flow $62,500 $84,500 $92,500

Year 2 Net Cash Flow $70,800 $95,020 $100,450

Year 3 Net Cash Flow $84,600 $102,500 $114,800

Year 4 Net Cash Flow $68,000 $94,800 $102,500

Year 5 Net Cash Flow $54,500 $76,000 $86,400

Salvage value (end of year 5) $12,000 $26,000 $38,000

It is explained to Jeremy that the expected return of the project is the sum of the weighted expected returns from each scenario.

Help with these two questions given the info above and explanation would be appreciated.

1) Does the project make sense if the cost of capital is 12%?

2 ) Does the project make sense if Jeremy demands an internal rate of return of 15%?

1 Answer

  • 9 years ago
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