A firm has an investment proposal, requiring an outlay of 80,000. The investment proposal isexpected to have two years economic life with no salvage value. In year 1, there is a 0.4probability that cash inflow after tax will be 50,000 and 0.6 probability that cash inflow aftertax will be 60,000. The probability assigned to cash inflow after tax for the year 2 is as follows:The cash inflow year 1The cash inflow year 2*24,000*32,00044,000*50,000Probability0.20.30.540,000€50,000*60,000*60,000Probability0.40.50.1The firm uses a 10% discount rate for this type of investment.Required:(i)Construct a decision tree for the proposed investment project and calculate the expectednet present value (NPV).(ii)What net present value will the project yield, if worst outcome is realized? What is theprobability of occurrence of this NPV?(iii) What will be the best outcome and the probability of that occurrence?(iv) Will the project be accepted?

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(i) Construct a decision tree for the proposed investment project and calculate the expected net present value (NPV). (ii) What net present value will the project yield, if worst outcome is realized? What is the probability of occurrence of this NPV? (iii) What will be the best outcome and the probability of that occurrence? (iv) Will the project be accepted?

(i) Construct a decision tree for the proposed investment project and calculate the expected net present value (NPV). (ii) What net present value will the project yield, if worst outcome is realized? What is the probability of occurrence of this NPV? (iii) What will be the best outcome and the probability of that occurrence? (iv) Will the project be accepted?

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter11: Capital Budgeting Decisions

Section: Chapter Questions

Problem 6EB: The management of Ryland International Is considering Investing in a new facility and the following...

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