The Basalt Corporation is considering a new venture. Management has made the following cash flow estimates for the project over the next three years under assumptions reflecting best, worst, and most likely scenarios in each year.
$\begin{array}{llll}& \mathrm{C}_{1} & \mathrm{C}_{2} & \mathrm{C}_{3} \\\text { Worst case } & \$ 200 & \$ 300 & \$ 400 \\\text { Most likely case } & \$ 300 & \$ 400 & \$ 500 \\\text { Best case } & \$ 400 & \$ 500 & \$ 600\end{array}$ The expected initial outlay (C₀) is $1,000, and the cost of capital is 12%. The following probability distribution for best, worst and most likely conditions is constant from year to year
$\begin{array}{ll}\text { Best case } & 25 \% \\\text { Most likely case } & 50 \% \\\text { Worst case } & 25 \%\end{array}$ Calculate the NPVs of the overall best, most likely, and worst case scenarios and the probability of each.

Question

The Basalt Corporation is considering a new venture. Management has made the following cash flow estimates for the project over the next three years under assumptions reflecting best, worst, and most likely scenarios in each year.

\begin{array}{llll}& \mathrm{C}_{1} & \mathrm{C}_{2} & \mathrm{C}_{3} \\\text { Worst case } & \$ 200 & \$ 300 & \$ 400 \\\text { Most likely case } & \$ 300 & \$ 400 & \$ 500 \\\text { Best case } & \$ 400 & \$ 500 & \$ 600\end{array}

The expected initial outlay (C₀) is $1,000, and the cost of capital is 12%. The following probability distribution for best, worst and most likely conditions is constant from year to year

\begin{array}{ll}\text { Best case } & 25 \% \\\text { Most likely case } & 50 \% \\\text { Worst case } & 25 \%\end{array}

Calculate the NPVs of the overall best, most likely, and worst case scenarios and the probability of each.

Quizplus · Accepted Answer

The Answer of The Basalt Corporation is considering a new venture. Management has made the following cash flow estimates for the project over the next three years under assumptions reflecting best, worst, and most likely scenarios in each year. $\begin{array}{llll} & \mathrm{C}_{1} & \mathrm{C}_{2} & \mathrm{C}_{3} \ \text { Worst case } & \$ 200 & \$ 300 & \$ 400 \ \text { Most likely case } & \$ 300 & \$ 400 & \$ 500 \ \text { Best case } & \$ 400 & \$ 500 & \$ 600 \end{array}$ The expected initial outlay (C₀) is $1,000, and the cost of capital is 12%. The following probability distribution for best, worst and most likely conditions is constant from year to year $\begin{array}{ll} \text { Best case } & 25 \% \ \text { Most likely case } & 50 \% \ \text { Worst case } & 25 \% \end{array}$ Calculate the NPVs of the overall best, most likely, and worst case scenarios and the probability of each.

The Basalt Corporation Is Considering a New Venture The Expected Initial Outlay (C0) Is $1,000, and the Cost

The Basalt Corporation Is Considering a New Venture The Expected Initial Outlay (C₀) Is $1,000, and the Cost