Nash, Inc Is Looking at a 4-Year Project That Will Cost

question 101

Essay

Nash, Inc. is looking at a 4-year project that will cost $4 million to initiate. Based on a range of economic forecasts, Nash has forecasted a worst case, best case and most likely case with respect to cash flows that this project will generate and assigned probabilities to these forecasts. The worst case forecast (30% probability)is $1.2 million per year. The best case (20% probability)is $1.8 million per year with an additional $1 million in the fourth year. The most likely forecast (50% probability)is $1.5 million per year with an additional $0.5 million in the fourth year. The cost of capital is 14%.
a. What is the NPV ($000)of the worst case scenario?
b. What is the NPV ($000)of the best case scenario?
c. What is the NPV ($000)of the most likely scenario?
d. What should Nash use to approximate the expected NPV ($000)of the project?

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Definitions:

Cash Dividends

Payments made by a corporation to its shareholders, usually in the form of cash, as a distribution of the company’s earnings.

Direct Method

A technique used in accounting to prepare the cash flow statement, where actual cash flows from operating activities are reported instead of adjustments to net income.

Operating Activities

Activities that constitute the primary or main activities of an entity, such as selling goods and services, which are reflected in the statement of cash flows.

Current Assets

Assets that are expected to be converted into cash, sold, or consumed within the year or within the operating cycle of the business, whichever is longer.