Nash, Inc. is looking at a 4-year project that will cost $4 million to initiate. Based on a range of economic forecasts, Nash has forecasted a worst case, best case and most likely case with respect to cash flows that this project will generate and assigned probabilities to these forecasts. The worst case forecast (30% probability) is $1.2 million per year. The best case (20% probability) is $1.8 million per year with an additional $1 million in the fourth year. The most likely forecast (50% probability) is $1.5 million per year with an additional $0.5 million in the fourth year. The cost of capital is 14%.
a. What is the NPV ($000) of the worst case scenario?
b. What is the NPV ($000) of the best case scenario?
c. What is the NPV ($000) of the most likely scenario?
d. What should Nash use to approximate the expected NPV ($000) of the project?

Question

Nash, Inc. is looking at a 4-year project that will cost $4 million to initiate. Based on a range of economic forecasts, Nash has forecasted a worst case, best case and most likely case with respect to cash flows that this project will generate and assigned probabilities to these forecasts. The worst case forecast (30% probability) is $1.2 million per year. The best case (20% probability) is $1.8 million per year with an additional $1 million in the fourth year. The most likely forecast (50% probability) is $1.5 million per year with an additional $0.5 million in the fourth year. The cost of capital is 14%.
 a.	What is the NPV ($000) of the worst case scenario?
b.	What is the NPV ($000) of the best case scenario?
c.	What is the NPV ($000) of the most likely scenario?
d.	What should Nash use to approximate the expected NPV ($000) of the project?

Quizplus · Accepted Answer

The Answer of Nash, Inc. is looking at a 4-year project that will cost $4 million to initiate. Based on a range of economic forecasts, Nash has forecasted a worst case, best case and most likely case with respect to cash flows that this project will generate and assigned probabilities to these forecasts. The worst case forecast (30% probability) is $1.2 million per year. The best case (20% probability) is $1.8 million per year with an additional $1 million in the fourth year. The most likely forecast (50% probability) is $1.5 million per year with an additional $0.5 million in the fourth year. The cost of capital is 14%.
 a.	What is the NPV ($000) of the worst case scenario?
b.	What is the NPV ($000) of the best case scenario?
c.	What is the NPV ($000) of the most likely scenario?
d.	What should Nash use to approximate the expected NPV ($000) of the project?

Nash, Inc Is Looking at a 4-Year Project That Will Cost