Probability Analysis. The Seattle HMO, Inc. is considering entering into a data processing contract with a leading consulting firm. Entering into such an agreement would require a current investment outlay of $200,000. The following net cash flows (cost savings) will be generated each year over the ten-year life of the management contract:
A. Calculate the expected cash flow.
B. Calculate the standard deviation and coefficient of variation of cash flows (risk).
C. Calculate the expected net present value for the investment if the firm uses a discount rate of 20%. Should the investment be undertaken?

Question

Probability Analysis. The Seattle HMO, Inc. is considering entering into a data processing contract with a leading consulting firm. Entering into such an agreement would require a current investment outlay of $200,000. The following net cash flows (cost savings) will be generated each year over the ten-year life of the management contract:
  A. Calculate the expected cash flow.
B. Calculate the standard deviation and coefficient of variation of cash flows (risk).
C. Calculate the expected net present value for the investment if the firm uses a discount rate of 20%. Should the investment be undertaken?

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The Answer of Probability Analysis. The Seattle HMO, Inc. is considering entering into a data processing contract with a leading consulting firm. Entering into such an agreement would require a current investment outlay of $200,000. The following net cash flows (cost savings) will be generated each year over the ten-year life of the management contract:
  A. Calculate the expected cash flow.
B. Calculate the standard deviation and coefficient of variation of cash flows (risk).
C. Calculate the expected net present value for the investment if the firm uses a discount rate of 20%. Should the investment be undertaken?