Formulas: 5. Powerful Wind, Inc. is a wind turbine manufacturer that is considering three investment projects: I, II, and III, that will cost $2.5M, $2.3M, and $3.7M respectively. The projects have an expected life of three, five, and seven years correspondingly. The firm’s Vice President of Finance has estimated the probability distribution for each project’s first after-tax cash flow (ATCF1) as shown in the following table: Project I's Project II's Project III's Scenario Probability ATCF1 ATCF1 $1,000,000 $550,000 $350,000 1 5% $1,150,000 $750,000 $600,000 2 15% $1,250,000 $950,000 $850,000 3 60% $1,350,000 $1,150,000 $1,100,000 4 15% $1,500,000 $1,350,000 $1,350,000 5 5% The Vice President of Finance uses the risk-adjusted discount technique to evaluate investment projects. He allocates risk premiums based on the coefficient of variation of each project’s cash flows according to the following table: Coefficient of Risk Premium Variation 0.0 -2.00% 0.2 0.00% 0.3 2.00% 0.4 4.00% 0.5 6.00% Each project’s after-tax cash flows are expected to grow at an annual rate of inflation of 3%. a. Determine the expected cash flows, standard deviation, and coefficient of variation of each project.
Formulas: 5. Powerful Wind, Inc. is a wind turbine manufacturer that is considering three investment projects: I, II, and III, that will cost $2.5M, $2.3M, and $3.7M respectively. The projects have an expected life of three, five, and seven years correspondingly. The firm’s Vice President of Finance has estimated the probability distribution for each project’s first after-tax cash flow (ATCF1) as shown in the following table: Scenario Probability Project I's ATCF1 Project II's ATCF1 Project III's 1 5% $1,000,000 $550,000 $350,000 2 15% $1,150,000 $750,000 $600,000 3 60% $1,250,000 $950,000 $850,000 4 15% $1,350,000 $1,150,000 $1,100,000 5 5% $1,500,000 $1,350,000 $1,350,000 The Vice President of Finance uses the risk-adjusted discount technique to evaluate investment projects. He allocates risk premiums based on the coefficient of variation of each project’s cash flows according to the following table: Coefficient of Variation Risk Premium 0.0 -2.00% 0.2 0.00% 0.3 2.00% 0.4 4.00% 0.5 6.00% Each project’s after-tax cash flows are expected to grow at an annual rate of inflation of 3%. a. Determine the expected cash flows, standard deviation, and coefficient of variation of each project.
IM_Chapter_12_IM_Problem_Set.docx