The Estimated Cash Flows of an Investment Project Are Shown

question 7

Essay

The estimated cash flows of an investment project are shown below. $$\begin{array} { | l | l | l | l | } \hline \text { Item } & \text { Optimistic } & \text { Most likely } & \text { Pessimistic } \\\hline \text { Initial investment } \$ & 745,000 & 750,000 & 755,000 \\\hline \text { Net annual revenue, } \$ / y e a r & 81,500 & 80,000 & 79,500 \\\hline \text { Market value, } \$ & 39,500 & 38,000 & 37,000 \\\hline \text { Project life, years } & 7 & 7 & 7 \\\hline\end{array}$$ Using a MARR of 14% per year, determine the AW for each of the three estimation conditions.

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Definitions:

Well-Diversified Portfolios

Investment portfolios that contain a wide variety of assets, aiming to minimize risk by spreading investments across different sectors or asset classes.

APT

Abbreviation for Arbitrage Pricing Theory, a multifactor financial model that describes the relationship between the return of a portfolio and the return of a single asset through a linear combination of macroeconomic factors.

CAPM

A model identifying the connection between the expected returns of assets, primarily shares, and their associated systematic risk, known as the Capital Asset Pricing Model.

Systematic Risk Factors

Market risks that affect the overall market and cannot be eliminated through diversification, such as interest rates, inflation, and economic cycles.