Suppose That the Forecasted Price Levels Shown in the Pro

question 28

Essay

Suppose that the forecasted price levels shown in the pro forma cash flow sheet are not deterministic, but rather, are expected to fluctuate due to market forces. The prices are expected to be normally distributed in each year, with the means equal to the expected values shown in the pro forma, but with standard deviations of $5.2, $5.3, and $5.5 in years 1, 2, and 3, respectively. Enter this pro forma in an Excel worksheet, with the appropriate @RISK functions for the random prices, and simulate 1,000 iterations. What is the expected NPV now? Would you recommend investing in this project? Explain.

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Definitions:

Cash Basis

Cash basis accounting is an accounting method where revenue and expenses are recorded only when cash is received or paid, respectively.

Sales Revenue

The income received by a company from its sales of goods or the provision of services.

Adjusting Entries

Accounting records entries registered at the conclusion of an accounting period for the purpose of assigning revenues and expenses to the period they truly took place.

Accrual Basis

A bookkeeping approach that logs income and expenses at the time they are accrued, without taking into account the timing of the cash flows.