1. Calculate the expected net cash flows for each one of the two years.. 2. Calculate and comment the standard deviations and the coefficient of variations of the NCFS of each year. What do they mean and what do they imply? 3. Should ALPHA proceed with the new bottle project based on the NPV evaluation approach?
1. Calculate the expected net cash flows for each one of the two years.. 2. Calculate and comment the standard deviations and the coefficient of variations of the NCFS of each year. What do they mean and what do they imply? 3. Should ALPHA proceed with the new bottle project based on the NPV evaluation approach?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
Transcribed Image Text:A bottle company ALPHA, is considering creating a new bottle of 0.25 lt. To decide
whether to invest in this project or not, they performed market research that costed
€5,000. The results indicated two possible scenarios that depend on the competitor's
reaction to create a similar product and on the percentage of the faithful customers of
ALPHA. Scenario A has a 45% chance to be realized, while scenario B has a probability
of 55%. For the project's realization the company must purchase special machinery that
cost €80,000, while transportation and installation costs amount to €2,000. The useful
life of the project is two years, and the machinery can be sold at the end of the useful
life for €30,000. Table 1 presents the pertinent economic data. At the end of the second
year the working capital is going to be recaptured. The tax rate is 25%, the weighted
average cost of capital is 10% and the company fully depreciates fixed assets for tax
purposes, using the straight-line depreciation method.
Table 1: Pertinent economic data
Year 1
Sales in pieces
Variable cost per unit of
products
Sale price per unit of products
Administrative & marketing
expenses
Working Capital
Scenario Scenario
A
B
150,000 200,000
0.8
1.5
20,000
15,000
1
1.7
25,000
15,000
Year 2
Scenario
A
200,000
1
1.8
25,000
17,000
Scenario
B
250,000
1.2
2
30,000
17,000
1. Calculate the expected net cash flows for each one of the two years.
2. Calculate and comment the standard deviations and the coefficient of variations of
the NCFs of each year. What do they mean and what do they imply?
3. Should ALPHA proceed with the new bottle project based on the NPV evaluation
approach?
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